How Can I Reduce My Tax Bill Next Year?

You completed your taxes and were surprised to discover that you owed a hefty sum to the IRS—and maybe even your state. You definitely don’t want a repeat of that next year.

Fortunately, there are ways to help lower your chances of owing so much money when April rolls around.

Before we dive into these strategies, be sure to note: Your goal shouldn’t be to get too large a refund; it’s an indication that too much money is being deducted from your paycheck throughout the year (which you subsequently lost the opportunity on which to earn interest). Ideally, you don’t want to owe or get back very much money at tax time.

Now, back to tax-lowering strategies!

Update Your W-4 Form

The IRS W-4 form (Employee’s Withholding Certificate) tells your employer how much federal tax to withhold from your paycheck based on factors including your tax filing status (single, married filing jointly, etc.), how many dependents you have and how much you plan to claim in deductions. Dependents, for tax deduction purposes, can be children or adults whom you’re supporting.

If you’re like most people, you filled this form out when you first started working for your current employer and then forgot about it. However, it’s a good idea to review it if you have a substantial tax bill, get a large refund, or any time your filing status or number of dependents changes.

Dependents (and Allowances)

Previously, the W-4 form included a section on withholding allowances. You could claim 0, 1 or 2 withholding allowances, and this would impact how much money was withheld from your paycheck. Claiming 0 allowances would result in more money being withheld from your take-home pay, decreasing the risk of a surprise tax bill in April.

Claiming 1 or 2 allowances would result in increasingly less money withheld from your paycheck, resulting in more take-home pay per paycheck and a smaller tax refund. However, more allowances meant you had an increased likelihood of owing money to the IRS.

However, in an attempt to simplify and streamline W-4 forms, the government eliminated withholding allowances in 2020. Now, you don’t enter allowances; you only enter the number of dependents you have living in your household. For example, if you have two children, you would claim 2 dependents. Once those children grow up and move out of the house (and are therefore no longer depending on your), you would have to claim 0 dependents.

If you do have dependents in your household, there is no benefit to not claiming them. In fact, failing to claim dependents would simply result in your paying more money to the IRS than you actually owe.

Filing Status

Your filing status on your W-4 determines how much in taxes your employer deducts, so it’s important you keep this updated if you don’t want them deducting too much or too little. There are five filing status to choose from:

Single

If you’re unmarried, this is your filing status. Your status is based on the last day of the calendar year. For example, if you were divorced as of December 31, 2024, you’re considered “single” for the entirety of the tax year.

Married Filing Jointly

Married couples can opt to file their taxes together. You report your combined income, deductions and credits on your return. And, you’re both responsible for any taxes owed. Depending on your income and other factors, filing jointly could help you qualify for more deductions or credits than if you filed separately, so you could save money.

Married Filing Separately

In some cases, it can make sense for married couples to file their taxes separately. With this approach, you submit only your own income and deductions. You’ll likely pay a higher tax bill, but this filing status can make sense if you’re separated, are worried about your partner’s tax liability or if you’re pursuing certain student loan repayment plans.

Head of the Household

This filing status is for unmarried people who cover more than half of a qualifying dependent’s support and housing costs. Using this status could help you qualify for a larger standard deduction.

Qualifying Surviving Spouse

If your spouse recently passed away and you have a child, this filing status is for you. You could qualify for a higher standard deduction and a lower tax bill.

Changing from “Single” filing status to “Married filing jointly” can make a difference in how much you owe. Consider this example:

You’re single and make $70,000. With your filing status, you qualify for a standard deduction of $14,600, reducing your taxable income to $55,400, putting you in the 22% tax bracket. 

You get married, and your partner makes $50,000 per year. As a married couple filing jointly, you qualify for a standard deduction of $29,200, bringing your combined income down to $90,800. Now, you’re in the 12% tax bracket, so this change could result in a savings for you.

Updating your W-4 with the appropriate filing status can help you ensure that the right amount of taxes is withheld, preventing any surprises at tax time. You can use the IRS’ Withholding Estimator to figure out exactly how much you should be withholding. If you find that you need to make changes, contact your Human Resources department to fill out a new W-4.

Make Quarterly Estimated Tax Payments

If you’re self-employed or have a side gig, you don’t have an employer who can withhold income taxes on your behalf. Instead, you’re responsible for paying income taxes on your own throughout the year. If you don’t, you risk having to pay underpayment penalties.

You can avoid this by making payments throughout the year using the 1040-ES form. The instructions on that form will also help you determine how much you should pay throughout the year to avoid a big year-end bill (and possible penalties). You can make these payments electronically to the IRS using its Electronic Federal Tax Payment System (EFTPS). The IRS website has information on how to sign up for this system.

The following deadlines apply for quarterly estimated payments:

Maximize Your Tax-Deferred Retirement Contributions

If you’re taking advantage of an employer-sponsored retirement or profit-sharing plan like a 401(k), your contributions come out of your paycheck every pay period. That means you’re reducing the amount of your income that you have to pay taxes on while building up a nice nest egg.

Typically, the lower your taxable income is, the less you’ll be taxed, as we noted earlier. For example, for the 2024 tax year, if you’re single and your taxable income is $60,000, you’re taxed at a rate of 22%. However, if you contribute $15,000 to your 401(k), you could reduce your taxable income to $45,000 dropping you to a 12% tax bracket.

The IRS has increased the limits on the amount of tax-deferred contributions employees can make to these plans for 2025. You can defer $23,500 for the year (up from $23,000 for 2024). If you’re 50 years old or older, you can make a “catch-up” deferral of $7,500, so you can contribute up to $31,000 to your 401(k). Check with your employer if you’re not sure how to change your contributions.

If you have a traditional IRA (in addition to or instead of an employer-sponsored plan), you can contribute up to $7,000 per year to your IRA. If you’re 50 or older, you can contribute up to $8,000. Depending on your income and whether you have access to an employer-sponsored retirement plan, you may be able to deduct some or all of your IRA contributions on your taxes.

A word about what “tax-deferred” means: With tax-deferred contributions, you immediately deduct the amount from your taxable income—either on your paycheck as with a 401(k) or when you pay your taxes, as with an IRA contribution. When you eventually access that money, you will pay taxes on it. However, the idea is that by then you’ll likely be working less, if at all, and earning less money, so you’re in a lower income bracket and paying a lower tax rate.

Other ways to maximize your tax-deferred contributions? Check to see if your employer offers Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs).

Increase Your Deductions

Since the standard deduction rate increased significantly beginning in tax year 2018 with the Tax Cuts and Jobs Act (TCJA), you may have found the amount of your standard deduction is higher than if you itemize your deductions. However, that doesn’t mean that you shouldn’t bother to keep track of things you can itemize. Unless you completely account for all of those things, you won’t know for certain whether you benefit by itemizing on your tax return.

Let’s start by looking at a few potentially significant (and often overlooked) deductions:

Sales taxes

If you make a large purchase, like a car, the sales tax is probably a good chunk of change. If you itemize your deductions, it may be deductible. Under current tax laws, you can deduct either the state and general sales tax you paid during the year or you can deduct the state and local income tax you paid; you can’t deduct both. The total deduction for state, local, sales and property taxes is capped at $10,000.

Medical/dental expenses

Many people don’t bother calculating these if they haven’t had major expenses over the past year. However, more expenses are deductible than you may realize. For example, say your AGI for 2025 is $50,000. Seven and a half percent of that is $3,750. If your deductible medical and dental expenses add up to $6,000, you can include $2,250 in your itemized deductions.

However, you can only deduct expenses that weren’t covered or reimbursed by insurance, and not all medical bills quality. You can view the list of eligible expenses on the IRS website.

Charitable contributions

Many people don’t keep track of these throughout the year unless they donate a significant amount of money to charity or give several pieces of furniture to Goodwill. 

However, your contributions may add up. And, if your deductions—including your charitable contributions—exceed the standard deduction amount, you may benefit from itemizing your deductions. After reaching that threshold, you can deduct your contributions to qualifying 501(c)(3) non-profit organizations. 

Depending on your contributions, you could deduct up to 60% of your AGI.

Note that donations to political candidates, political parties and political action committees (PACs) are not tax-deductible.

Mortgage interest

If you have a mortgage, you may qualify for the mortgage interest deduction. Those who itemize their taxes can deduct the interest they paid during the tax year on the first $750,000 of your mortgage debt for your primary or second home.

Student loan interest

If you’re one of the millions of people with outstanding student loan debt, you may be eligible for the student loan interest deduction. You can qualify for this deduction even if you don’t itemize your deductions. Depending on your income, you can deduct $2,500 or the amount of actual interest you paid (whichever is less).

Consult a Tax Professional

Finally, if you’ve been using a tax preparation software to do your taxes, but end up with a hefty tax bill, it may be worthwhile to go to a professional tax preparer or a certified public accountant (CPA)—at least for one year. It costs more (but in many cases, these services are tax deductible), but if they find areas where you can save on your taxes (and ensure you don’t underpay or have to pay penalties!), it will be more than worth the price.

Before altering your tax strategy, consult with your tax specialist. They have a firm understanding of your wants and needs, as well as the knowledge of tax law required to maximize your wealth potential.