Whether you’re a business owner or an individual taxpayer, no one wants to pay more in taxes to the IRS than they have to. Fortunately, there are a wide range of strategies permitted under the Tax Code that can help minimize your liability. Taking all available deductions and credits, maximizing your retirement contributions, and using a health savings account are just a few ways you can reduce your gross income that is subject to taxation.
How Can I Minimize My Tax Liability?
Here are some key strategies that can be implemented to reduce your tax bill:
1. Understand the Deductions That Are Available
One of the most common ways to minimize your tax liability is to take all available deductions that are available. Specifically, deductions can reduce your taxable income and lower the amount of tax you owe. Some examples of common tax deductions for individuals can include:
- Retirement contributions
- Student loan interest (if your income meets the criteria)
- Health Savings Account (HSA) contributions
- Alimony (if your divorce was finalized prior to 2019)
- Mortgage interest
- State and local taxes
- Unreimbursed medical expenses more than 7.5% of your Adjusted Gross Income
Notably, business owners and self-employed individuals can deduct a broad scope of ordinary and necessary business expenses, including marketing costs, business travel expenses, business insurance, depreciation, and employee compensation. A home office deduction is also available if your home is used regularly and exclusively for your business.
2. Take Advantage of Tax Credits
Not to be confused with a deduction which reduces your taxable income, a credit is an amount you subtract from the tax you owe. Credits can lower your tax payment or increase your refund. Examples of tax credits for individuals can include the following:
- Family and dependent credits
- Homeowner credits
- Electric vehicle credits
- Earned income tax credits (depending upon your income)
- Higher education credits
Some tax credits are refundable, which means you can receive a refund even if your tax liability is reduced to zero. A tax professional can determine whether you meet the eligibility criteria for certain credits and assist you with claiming them.
3. Maximize Your Retirement Contributions
One of the easiest ways to reduce your tax liability is by contributing to a retirement account. Each type of retirement account has different tax implications. For instance, with a traditional 401(k), contributions are made with pre-tax dollars and reduce your taxable income in the year you contribute. If you’re under the age of 50, the maximum amount you can contribute to a 401(k) in 2025 is $23,500.
There is no upfront tax deduction by contributing to a Roth 401(k) or an IRA. However, qualified withdrawals during retirement are tax-free, along with any investment earnings.
4. Consider Using a Health Savings Account
An often overlooked strategy to minimize your tax liability is utilizing a Health Savings Account. By contributing money into an HSA, you can decrease your adjusted gross income. Importantly, HSAs have a triple tax benefit — not only do they help you lower your tax bill, but they also offer tax-deferred growth and tax-free withdrawals for qualified medical expenses.
5. Make Charitable Contributions
Contributions made to 501(c)(3) charities have tax-exempt status. By donating to a charity, you can support a cause you believe in while lowering your tax burden. The Tax Code recognizes several different forms of charitable contributions, including cash, tangible property, appreciated assets, and qualified charitable distributions from IRAs.
Contact an Experienced Tax Professional
To minimize your tax liability, it’s essential to plan year-round. A knowledgeable tax professional can help you implement tailored tax-efficient strategies based on your financial situation. Based in Fairfield, Connecticut, Rolleri & Sheppard CPAs, LLP offers individuals and business owners trusted guidance and customized solutions for tax planning matters. Contact us online or call (203) 259-CPAS to schedule a consultation.
