Best Tax Strategies: How To Lower Your Tax Bill

Nobody likes paying more taxes than necessary, yet many Americans leave money on the table each year through missed deductions and overlooked investment opportunities.

Regardless of how much you earn, you can save substantially by making informed decisions about your money throughout the year. This guide covers 10 effective tax-reduction methods that can work for many taxpayers, from choosing the best filing status to buying municipal bonds.

1. Know your tax bracket

Lowering your tax bill starts with figuring out your tax bracket, which affects how much you have to pay. For the 2024 and 2025 tax years, federal tax rates range from 10% to 37%.

2024 tax rates

2025 tax rates

When you file taxes in 2025, you’ll pay the 2024 tax rates. When you file in 2026, you’ll pay the 2025 tax rates. The IRS adjusts these brackets for inflation yearly, typically increasing the income ranges at each tax rate.

Many taxpayers don’t understand how these percentages apply to them. The most common misconception is that your tax bracket represents what you pay on all of your income, which is not the case. The U.S. has a progressive tax system, which means that the IRS taxes different portions of your income at increasing rates as you earn more.

For example, if you're single and make $95,000 in taxable income in 2024, you're in the 22% bracket for the 2025 tax year. You'll pay:

1. 10% on the first $11,925
2. 12% on your earnings between $11,925 and $48,475
3. 22% on your earnings above $48,475 (which covers the rest of your income)

Understanding how much you have to pay in taxes helps you figure out how to manage your money and understand which tax strategies might work for you.

2. Double-check your filing status

Your filing status affects your tax bracket, standard deduction amount, and eligibility for certain tax benefits. So, choosing the right status can potentially help you lower your tax bill.

For most married couples, filing jointly — or combining your income with your spouse’s for tax purposes — gives you the best benefits because of broader bracket ranges and higher standard deductions. But filing separately can make sense if you have good reason to keep your finances apart, such as if one spouse has a lot of student loans or medical bills and might qualify for deductions or when you’re going through a divorce or separation. Losing a spouse can impact your taxes, too.

If you’re not married, pay over half of the household expenses, and have a qualifying dependent living with you, you may be able to qualify for the head of household tax status, which provides the most generous tax brackets and standard deductions than single filers.

Choosing the wrong tax status is a common and costly mistake, but you can avoid it by checking your filing status with the IRS’ Interactive Tax Assistant (ITA) tool.

2.5. Decide between standard deduction vs. itemizing

Itemizing means that you break down all of the expenses you want subtracted from your income instead of taking the flat standard deduction, which can save you money at tax time if you qualify for enough breaks.

If you don’t plan to itemize deductions, you can take the standard deduction to reduce your taxable income by the maximum amount for your filing status. For 2024, the standard deduction is $14,600 for single and married couples filing separately, $21,900 for heads of household, and $29,200 for married couples filing jointly. 

For 2025, the standard deduction is $15,000 for single and married couples filing separately, $22,500 for heads of household, and $30,000 for married couples filing jointly. Most taxpayers can take the standard deduction, but it’s not always the best option.

Many tax breaks — including a lot of deductions — are only available when you itemize. Deductions you can claim without itemizing exist, though, and may be referred to as “above-the-line” deductions.

3. Take advantage of tax deductions and credits

Deductions and credits both help reduce the amount you owe in taxes, but they work differently: Deductions lower your taxable income, and credits directly reduce your tax bill.

To give you an example, a $1,000 deduction in the 24% bracket would save you $240, but a $1,000 credit saves you $1,000 regardless of your bracket.

There are hundreds of tax deductions and credits available to taxpayers. You may qualify for tax breaks for:

• Paying mortgage interest
• Paying for childcare
• Adopting a child
• Making charitable contributions
• Paying self-employed business expenses
• Making energy-efficient home improvements
• Using your car or home for business
• Contribute to retirement accounts
• And so much more

Learn more about credits and deductions on the IRS website.

It’s important to ​​keep detailed records of expenses that could qualify for either deductions or credits because they all come with limits and requirements. If you’re like me, it can be tough to keep track of expenses, but it’s worth being disciplined enough to do this right.

4. Bundle your deductions

Strategically bundling your tax deductions can help you exceed the standard deduction threshold and maximize your tax savings. Instead of spreading deductions across multiple years, you can concentrate them into a single tax year.

Here’s an example of how it works. If you typically donate $5,000 annually to charity and pay $8,000 in property taxes, you'd reach $13,000 in deductions, below the $14,600 standard deduction for singles in 2024.

But if you combine two years of charitable giving ($10,000) into one tax year, plus your $8,000 in property taxes, you'd have $18,000 in deductions. This potentially saves you money and beats the standard deduction.

I’d only recommend doing this if you’re worried about paying too much in taxes in a particular year. The downside is that doing your taxes this way takes longer. In my experience, hiring an accountant helps tremendously.

5. Maximize your retirement savings

You can get immediate tax benefits and build long-term wealth by contributing to your retirement accounts. Traditional 401(k) and IRA contributions reduce your taxable income (and your investments are tax-deferred).

How much you can contribute to your 401(k) and IRA changes yearly. The annual 401(k) contribution limit is $23,000 for 2024 and $23,500 for 2025. The IRA contribution limit is $7,000 for 2024 and $7,000 for 2025. If you exceed these limits, you can get double-taxed and pay a penalty.

6. Harvest tax losses

Selling investments at a loss can help you save on taxes by reducing your capital gains taxes or allowing you to deduct up to $3,000 from your ordinary income each year. This is called tax loss harvesting, and you can use this tax strategy to offset money you’ve made investing with money you’ve lost.

This is a complicated strategy with rules you don’t want to break (like the wash-sale rule), so I recommend contacting a financial advisor before trying. Many online brokerages that offer automated investing also bake this strategy into their algorithms, including Wealthfront and E*TRADE Core Portfolios.

7. Make charitable donations

Charitable giving is a feel-good way to save on taxes. The IRS allows you to deduct up to 60% of your adjusted gross income in donations to charities when you itemize deductions on your tax return.

Donating appreciated investments is an especially good idea because you can receive a tax deduction for the fair market value without realizing capital gains.

8. Contribute to a 529 college savings plan

529 plans are investment accounts that help you save money for your children’s education. They come with two tax advantages: Your earnings grow tax-free, and withdrawals aren’t taxed when the money is used for qualified education expenses such as tuition or books.

There aren’t tax deductions for these plans, but there may be state benefits depending on where you live. Keep in mind that the annual gift tax limit may apply to 529 savings.

9. Use a dependent care FSA (DCFSA)

A dependent care flexible spending account (FSA) lets you use pre-tax dollars for childcare expenses and other dependent services. These plans let you contribute up to $5,000 ($2,500 for married couples filing separately) in pre-tax income annually, which reduces your taxable income. These are employer-sponsored plans you won’t find with every company, and you can’t double-count DCFSA contributions for the dependent care tax credit.

Qualified expenses can include daycare/preschool, summer camps, and babysitting. Opening and maxing out this account can be a great tax strategy for parents, and elder care may qualify, too.

10. Invest in municipal bonds

Municipal bonds, or “munis,” are one of the best tax-free investments I wish everyone knew about. They’re loans to state and local governments that fund public projects like repairing roads and building schools.

These bonds typically provide tax-free interest at the federal level. If you buy them from your home state, they’re also usually tax-free. Municipal bonds have lower yields than taxable bonds, but they can be a smart tax-saving strategy for high earners and residents of high-tax states.

A taxable bond paying 5% earns you $500 annually on a $10,000 investment, but you keep only $380 after 24% federal tax. A municipal bond might get you only 4% or $400, but you can keep all of your money. So your after-tax income is higher despite the lower rate.

FAQs

Bottom line

Smart tax planning requires you to make educated decisions throughout the year. Understanding how taxes work is important, and knowing your tax bracket and what filing status will give you the most benefit are good places to start. But even greater savings come from taking full advantage of deductions and credits and optimizing your investments to decrease your tax bill and increase your after-tax income.

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