How to Save on Your Taxes Each Year

4 ways to reduce your tax liability

Though everyone’s tax situation is different, there are a few proven ways to reduce tax liability each year.

1. Claim deductions and credits

The IRS lets taxpayers claim certain credits each year to reduce their tax liability. These credits are built into the tax code, and while you may not qualify for every credit or deduction, you’ll likely qualify for at least a few each year. Some common examples include:

• Using pre-tax dollars to fund retirement savings plans such as an IRA or 401k
• Taking allowable deductions for items such as mortgage interest, property taxes, medical expenses, business expenses, and charitable contributions
• Claiming allowable credits such as the child tax credit

One of the reasons the tax code is so complicated is due to the many details and provisions surrounding some of these laws. So long as you are careful to follow the IRS guidelines set forth, reducing your taxes in this way is perfectly legal.

2. Work with tax professionals

Strategic tax planning plays an important role in reducing tax liability, and this is where a tax professional, like a certified public accountant (CPA) or tax attorney, can be particularly helpful. The tax code is complex to interpret, and you want to make sure that your efforts to minimize your taxes provide you with the maximum benefit while staying within IRS guidelines.

There is often more than one way to structure a taxable transaction, and careful tax planning considers and evaluates the tax impact of each option. By factoring in the tax impact of each option as well as the effect of the transaction itself, you may be able to reduce or eliminate the resulting tax liability. Here are some scenarios where strategic tax planning can be impactful in helping to avoid or reduce taxes:

• Investing in municipal bonds. Tax-exempt municipal bonds may yield a lower interest rate than other investments, but the effective yield rate when the tax benefit is factored in may make these bonds the more profitable investment.
• Capital gains treatment. Although it may be profitable to sell an investment now, it may be worth selling it in the future instead, even at a lower price, in order to be eligible for long-term capital gain tax treatment.
• Accelerated depreciation. This tax planning method lets you deduct a larger amount of depreciation for certain qualifying items upfront, reducing the tax you owe earlier in the item’s useful life. This helps you save on taxes early on instead of making you wait for the item to depreciate over the years.

3. Use estate planning tools to your advantage

Creating an estate plan can help you save on your taxes year after year while still helping you create a lasting legacy for your loved ones. Working with an estate planning attorney can help you reduce the total taxable value of your estate.

Depending on your situation and your goals, you may choose to establish a trust and transfer assets into the trust to reduce the total taxable value of your estate. Or you may choose to form an estate planning LLC that lets you control how your wealth is distributed to your loved ones when you die. 

4. Contribute to your retirement accounts

You may be able to reduce what you owe by contributing the maximum amount to your retirement accounts. For 2025, you’re able to contribute up to $23,500 to your 401(k) and $7,000 to an individual retirement account (IRA). 

If you’re over 50, you can contribute an extra $7,500 to your 401(k) and another $1,000 to your IRA each year without paying a penalty.

Tax reduction is not the same as tax evasion

It’s important to remember that reducing your tax liability is not the same as evading taxes. It’s legal and, when done correctly, is fully sanctioned by the IRS. Tax evasion describes illegally and deliberately falsifying or concealing information to reduce or eliminate a tax liability. Typical examples of tax evasion include:

• Keeping two sets of financial records
• Purposely under-reporting income
• Claiming false deductions or over-stating deductions
• Claiming personal expenses as business expenses

Tax evasion is subject to fines of up $250,000 for individuals ($500,000 for corporations) and jail time of up to five years. Because the line between legal tax avoidance and illegal tax evasion is one that you don't want to cross, and because tax law can be extremely complex to interpret, a competent tax professional should be consulted to ensure that you stay on the right side of the law.

Let LegalZoom help

Creating a comprehensive estate plan can help you reduce your tax liability and may help your loved ones avoid probate or costly estate planning taxes. With our estate planning services, you can create a detailed will that outlines your final wishes and makes it easier for your loved ones to honor your memory. Or you can establish a trust that helps you reduce the taxable value of your estate while helping you preserve generational wealth for those you love.

FAQs about saving on taxes

How can I reduce taxes on my income?

You can save on your taxes each year by implementing different tax planning strategies and working with a CPA. Your PA will evaluate your finances and help you identify credits you qualify for, deductions you can take, and any losses you may claim on your taxes to reduce what you owe. 

Is tax evasion ever legal?

No. Tax evasion is illegal, and if you’re caught, you could face penalties including fines and, in some cases, jail time. 

What can I write off on my taxes?

Everyone’s tax situation is different. However, most people can write off expenses like mortgage interest, capital losses, charitable contributions, gambling losses, and other similar expenses. However, to write those items off, you’ll need to itemize your expenses. You may want to work with a CPA or tax specialist to ensure that you write off everything you can. 

What are some commonly overlooked tax deductions?

Some of the most commonly overlooked deductions include reinvested dividends earned on existing investments, moving expenses, and certain tax credits. Ask your accountant if you’re eligible for any of these deductions.

Naomi Levenspil contributed to this article.