We often hear about millionaires and billionaires paying less in taxes. In fact, Warren Buffett once said he pays a lower tax rate than his personal assistant! This got me thinking – what can the average middle-class person do to reduce taxes and learn how to reduce taxes legally?
But before we dive into the tips, here’s a quick disclaimer: I am not a CPA, so please consult a tax professional for personalized advice on how to reduce your taxes.
Taxes can take a big bite out of our paychecks, but understanding how to reduce taxes can help you keep more of your hard-earned money. Fortunately, there are legal ways to lower your tax bill.
Here are five simple strategies anyone can use.
1. Max Out Retirement Contributions
Saving for retirement is one of the best ways to reduce taxable income while securing your financial future. Here’s how:
401(k) & 403(b): Employer-Sponsored Retirement Plans
- Contributions are made pre-tax, lowering your taxable income.
- Employers may offer matching contributions – essentially free money!
- 2025 contribution limit: $23,000 (plus an extra $7,500 if you’re 50+).
- Taxes are deferred until withdrawal in retirement when you may be in a lower tax bracket.
- Bonus: Employer-matched contributions = free money + tax savings.
Traditional IRA: Tax-Deferred Growth
- Contributions may be tax-deductible, depending on income and whether you have an employer-sponsored retirement plan.
- 2025 contribution limit: $7,000 (or $8,000 if you’re 50+).
- Taxes are paid upon withdrawal, typically at a lower rate in retirement.
Roth IRA: Tax-Free Withdrawals in Retirement
- No upfront tax deduction, but earnings grow tax-free, and withdrawals in retirement are tax-free if rules are met.
- Income limits apply for eligibility.
- Great option if you expect to be in a higher tax bracket later.
Pro tip!
Looking to hedge against market risk while benefiting from tax-deferred growth?
Diversifying your IRAs with annuities can provide financial stability and a reliable source of lifelong income. Learn more about how annuities can work for you here.
✅ Tax Benefit: Maximizing retirement contributions lowers taxable income today while allowing savings to grow tax-deferred or tax-free, depending on the account type. Fixed indexed annuities add an extra layer of protection by mitigating market risks while offering tax advantages.
2. Take Advantage of Tax Credits
Tax credits directly reduce the amount of taxes you owe – dollar for dollar – making them even more valuable than deductions (which only reduce taxable income).
Here are some key tax credits:
Earned Income Tax Credit (EITC)
- Designed for low-to-moderate-income earners.
- Refundable (meaning if your tax bill is zero, you can still receive the credit as a refund).
- 2025 max credit: Up to $8,046 for families with three or more children.
Child Tax Credit (CTC)
- Worth up to $2,000 per child under 17.
- Up to $1,700 is refundable, meaning you can receive money back even if you owe no taxes.
American Opportunity Tax Credit (AOTC) – Education Credit
- Covers up to $2,500 per year for eligible college expenses.
- 40% refundable, meaning up to $1,000 can be refunded even if you owe no taxes.
Saver’s Credit (Retirement Savings Contribution Credit)
- Available to individuals who contribute to a 401(k), IRA, or other retirement accounts.
- Income limits apply. Check the IRS website for the latest eligibility details and confirmed values.
- Credit amount: Up to $1,000 for individuals or $2,000 for married couples filing jointly.
Example: Mira, who works in retail, is married and earned $41,000 in 2024. Her spouse was unemployed with no earnings.
Mira contributed $2,000 to her IRA. After deducting this contribution, their adjusted gross income (AGI) on their joint tax return is $39,000 – well below the $73,000 income limit.
Since their income qualifies for the 50% credit, Mira can claim $1,000 (50% of $2,000) on their 2024 tax return, directly reducing their tax bill.
✅ Tax Benefits: Tax credits reduce your tax bill dollar for dollar – some are refundable, meaning they can put extra cash in your pocket even if you owe nothing in taxes.
3. Use an HSA or FSA for Medical or Child Care Expenses
Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow you to set aside pre-tax dollars for qualified expenses. HSAs help with medical costs, while FSAs can be used for both medical and child care expenses – all while reducing your taxable income.
Health Savings Account (HSA)
- Requires a high-deductible health plan (HDHP) to qualify.
- 2025 contribution limits: $4,150 (single), $8,300 (family) (+$1,000 if 55+).
- Triple Tax Advantage: Contributions are tax-deductible. Money grows tax-free. Withdrawals for medical expenses are tax-free.
- No use-it-or-lose-it rule: Funds roll over year to year, making it a great long-term savings tool.
Flexible Spending Account (FSA)
Available through employers.
2025 contribution limit: $3,300 per individual.
- Two types of FSAs: Health FSA – Covers medical expenses like doctor visits, prescriptions, dental, and vision care. Dependent Care FSA – Covers child care, preschool, after-school programs, and even elder care.
- Use-it-or-lose-it rule: Funds expire at year-end unless your employer allows a small carryover.
✅ Tax Benefits: Using an HSA or FSA lowers taxable income, helping you reduce taxes while covering essential medical and child care expenses.
4. Itemize Deductions If They’re Higher Than the Standard Deduction
The standard deduction for 2025: $14,600 (single) and $29,200 (married filing jointly). If your deductible expenses exceed this, it’s worth itemizing deductions to lower taxable income.
Key deductions to consider:
Mortgage Interest: If you own a home, you can deduct interest on mortgages up to $750,000.
State & Local Taxes (SALT): Deduct up to $10,000 in state income, sales, and property taxes.
Charitable Contributions: Cash donations to nonprofits are deductible (up to 60% of your AGI).
Medical Expenses: If medical expenses exceed 7.5% of your adjusted gross income (AGI), you can deduct the excess.
✅ Tax Benefit: If your total deductions exceed the standard deduction, itemizing can save you more money.
5. Claim Work-Related and Side Hustle Deductions
If you work remotely, freelance, or have a side business, you can deduct work-related expenses.
- Home Office Deduction: If you’re self-employed, you can deduct a percentage of rent/mortgage, utilities, and internet. The simplified deduction is $5 per square foot (max 300 sq. ft. = $1,500).
- Self-Employment Deductions: Business expenses like advertising, software, travel, meals, office supplies, and website costs are deductible.
- Self-employment tax deduction: You can deduct half of your self-employment tax (15.3%).
- Vehicle Use: If you use your car for business, you can deduct mileage (67 cents per mile in 2024, TBD for 2025). Keep a log of business trips to maximize deductions.
✅ Tax Benefit: If you have a side hustle or small business, you can legally deduct expenses to reduce taxable income.
Final Thoughts!
Keeping taxes low requires strategic planning – taking advantage of deductions, credits, and tax-advantaged accounts. Working with a tax professional can help you maximize savings and avoid missing valuable deductions.
Beyond tax savings, it’s essential to strengthen your overall financial health, especially in a volatile economy. Check out these resources for practical tips:
🔹 5 Simple Personal Finance Tips for Everyday People
🔹 How to Survive a Layoff and Protect Your Finances
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