One of Benjamin Franklin’s most famous and often-cited quotes is, “In this world, nothing can be said to be certain except death and taxes.” While paying our fair share of taxes is essential to keep public schools funded, roads maintained, and parks and recreation services operating smoothly, it’s equally important to be smart about tax savings. By doing so, we can ensure that our hard-earned dollars help us maintain a higher quality of life. Here are some practical and legal tax-saving tips specifically for regular W-2 earners (employees who receive a paycheck with taxes withheld).
1. Max Out Employer-Sponsored Retirement Accounts
Retirement Accounts such as 401(k), 403(b), or TSP are some of the most effective ways to save on taxes while building long-term wealth. For any of these accounts, you can contribute either to a Traditional account or a Roth account. Take 401(k) as an example:
Traditional 401k: A Tax Break Right Now
Contributions are made with pre-tax dollars, which lowers your taxable income and reduces the amount of income tax you owe today. The money you invest then grows tax-deferred, meaning you don’t pay taxes each year on interest, dividends, or capital gains—allowing your savings to compound faster.
Roth 401k: A Tax Break in Retirement
While a traditional IRA offers an immediate tax deduction, a Roth IRA provides its benefits later—during retirement. Because contributions are made with after-tax dollars, both your investment growth and withdrawals are completely tax-free in retirement. This can be a major advantage for younger investors in their 20s or 30s, as it allows decades of potential tax-free compounding throughout their careers.
Look into Employer Matching
Many employers also match contributions, adding extra, tax-advantaged money to your account. In retirement, withdrawals are taxed at your ordinary income rate, which for many people is lower than during their working years, making the 401(k) a powerful tool for both tax savings and financial growth.
2. Max out IRA
Not everyone has a 401(k), but everyone can open up an IRA account. Similar to an employer-sponsored retirement account, you can elect to contribute either to a Traditional IRA or a Roth IRA, and your contributions will be tax deductibles. The amount you are eligible to contribute depends on factors such as your income level and whether you or your spouse are covered by a workplace retirement plan. For instance, in 2025 (for taxes filed in 2026), if you’re married filing jointly, covered by an employer plan, and your modified adjusted gross income is $146,000 or higher, your deduction may be limited or unavailable. Contribution limits also apply — for 2025, you can contribute up to $7,000 annually, or $8,000 if you’re age 50 or older. Additionally, you have until the tax filing deadline to make IRA contributions for the previous year, giving you extra flexibility to maximize your tax benefits.
3. Take Advantage of Pre-Tax Benefits
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) both help you reduce your taxable income by putting money away for healthcare expenses.
Health Savings Account (HSA): Available if you have a high-deductible health plan.
Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for medical expenses. The HSA contribution limits for 2025 are $4,300 for self-only coverage and $8,550 for family coverage. Those 55 and older who are not enrolled in Medicare can contribute an additional $1,000 as a catch-up contribution.
Flexible Spending Account (FSA): Use pre-tax dollars for medical or dependent care costs.
Contributions are taken from your paychecks directly and put away in the FSA account, so you don’t pay taxes on them. The Health FSA contribution limits for 2025 are $3,300 per year, with a $660 rollover maximum. Dependent Care FSA contribution limits for 2025 are $5,000 per household (married filing jointly).
4. Adjust Your Withholding
The W-4 form is a form you fill out to tell your employer how much tax to withhold from each paycheck. Review your W-4 form each year or after major life changes (marriage, new baby, home purchase) to make sure you are withholding the right amount based on your tax estimates. You don’t want to over-withhold: while a big refund is nice, you would be giving IRS an interest-free loan while missing out time in investment. You also want to be careful and not under-withhold: you’ll end up with unexpected tax bill when you file your return and may be subject to an underpayment penalty.
5. Look Into Tax Credits You May Qualify For
Tax credits are one of the most powerful ways to reduce your tax bill because, unlike deductions (which lower your taxable income), credits directly reduce the amount of tax you owe — dollar for dollar. Popular tax credits include:
Tax Credits for low-to-middle-income households
Earned Income Tax Credit: The rules can get complex, but if you think you’ll earn less than $68,675 in 2025, the earned income tax credit might be worth looking into as it could get you up to $8,046 when you file in 2026.
Premium tax credit is another refundable tax benefit that is worth looking into. It can help offset the cost of health insurance premiums from qualified health insurance marketplace plans.
Child Tax Credit
The child tax credit could get you up to $2,200 per kid, with $1,700 being potentially refundable through the additional child tax credit. You may qualify for the full credit only if your modified adjusted gross income is under:
- $400,000 for those married filing jointly and $200,000 for all other filers.
- The higher your income, the less you’ll qualify for.
Lifetime Learning Credit
The lifetime learning credit can get up to $2,000 (per return, not per student) for tuition, activity fees, books, supplies and equipment for undergraduate, graduate or even nondegree courses at accredited institutions.
6. Kids’ 529 with Triple Tax Advantages
While it would be everyone’s dream that their kids would get a full ride scholarship to their dream colleges, it would be wise to still plan realistically and take advantage of the tax benefits of 529 accounts.
- While 529 contributions are after-tax dollars, some states offer state income tax deductions or credits for contributions to your kids’ 529 accounts. Check your state and see if there’s any tax incentive.
- Contributions in 529 accounts grow tax-free – You won’t pay taxes each year on interest, dividends, or capital gains — the money compounds without any taxes.
- Withdrawals are tax-free when used for qualified education expenses. This includes tuition, books, fees, supplies, and even room and board for college. You can also use up to $10,000 per year for k-12 tuition and up to $10,000 total toward student loan repayment. You can also change the beneficiary to another family member or even yourself without triggering taxes.
A quick reminder: if you use 529 funds for non-qualified expenses, only the earnings portion (not your contributions) will be subject to income tax plus a 10% penalty. To plan wisely, it’s a good idea to use a compound interest calculator to estimate how much you’ll need to invest today to cover your child’s education costs when the time comes.
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