How to Pay Less Taxes (and Keep More of Your Money)

That time of year is fast approaching – tax season.

Let’s talk about how you can decrease the amount of taxes you will pay in 2025!

Pay the least amount of taxes in 2025 by opening these accounts.

Table of Contents

Most people hate thinking about taxes, so they don’t. Or at least not until they have to file them every year in April. But that’s actually the worst time to think about taxes…because you can’t make any changes to help yourself.

Since 2024 is over, the taxes you’ll be filing in April are pretty much set in stone. The best thing you can do for yourself right now for last year’s taxes is to get a jump start on filing them by gathering all of your tax documents and making a plan for filing (whether you’ll be doing it on your own, using a tax computer program to help you, or having a professional tax preparer or accountant do it for you). By the way, don’t forget to include things like business deductions and interest paid on student loans. Here’s a quick link to the IRS website about 2024 student loan interest tax deductions.

But, if you’re wondering how you can pay less taxes for 2025, there are a few options!

Now, you might be wondering why an HR professional wants to talk to you about taxes. What do taxes have to do with your career? Well, quite a bit actually since taxes are tied up with your salary, 401(k), and benefits.

Before we go on, I need to give you this disclaimer: I am not an accountant, tax attorney, or other tax professional. This information is not meant as professional guidance or advice. The information provided in this post has been gathered from the IRS website and NerdWallet. For specific questions and information about your taxes, please reach out to the IRS or a tax attorney.

The first step everyone should take is figuring out how much their annual pay is and determining what tax bracket they’re currently in.

It’s always surprising how many people do not know how much money they make in a year! They think they do, but they don’t. So while this might seem like a basic step you can bypass, don’t assume you know the answer.

Check your paycheck stubs or your W-2, ask your payroll department, account for overtime (if you’re hourly) and bonuses, any investment sales, etc. If you’re anticipating a pay increase, a promotion, or a job change in 2025, keep in mind that you will need to revisit this step once those changes come into play. Now back to tax brackets…

As reported by Nerd Wallet, there are seven tax brackets set by the IRS. Beyond the seven general tax brackets, they’re further broken out by whether you file as single, married, or married but filing separately. If you’re married but you and your spouse file your taxes separately from one another, the tax brackets are the same as if you were filing as single.

These tax brackets are super important because they tell you the percentage of tax you’ll be required to pay the government based on how much money you make. This is why it’s imperative not to just go by your hourly rate or the salary that was in your offer letter. Tax brackets include what I mentioned earlier – overtime, holiday pay, bonuses, investment cashouts, and pre-tax contributions (this last one is what I’m diving into a little further down).

Once you’ve added up your total income for the year, you look at the pay ranges for each tax bracket until you reach the bracket that your total income falls into. For example, the first tax bracket at 10% has a pay range of $0 - $23,850. If your total annual income is $20,000, then that is your tax bracket! Whatever percentage that bracket specifies, that’s your tax percentage.

Now, I’m a big believer in everyone paying their fair share of taxes and following the IRS’ rules. But I also think that low-income and middle-class families don’t receive many “breaks” when it comes to money, so I’m also a supporter of those folks taking advantage of the tax cut programs that the IRS does offer them so that they can keep as much of their hard-earned money for themselves and their children as possible. If you’re going to have to give that money to the government otherwise, why not take advantage of the few options the IRS gives us to keep that money?

So, let’s say you just received a pay increase that pushed you and your family into a higher tax bracket. You were excited about the extra money you would be making because it would allow you to save a little for emergencies, enroll your child in swim lessons, maybe you could take a vacation, or it would just give you a little extra breathing room in your budget. But then you realize that the pay increase isn’t as helpful as you thought because now you have to pay a higher tax percentage. This is always disappointing at best, but sometimes it’s enough to throw a family into a financial panic. So…what should you do?

Lower your taxes and save more money for you and your family!

Your goal is to keep as much of your money as legally possible and there are four main ways to do this:

·         Traditional (pre-tax) 401(k) contributions

·         Traditional (pre-tax) IRA contributions

·         HSA contributions

·         FSA contributions

I’m going to break these down for you so you understand the benefits of each. What might be beneficial for you today may change over time, but as long as you’re taking advantage of at least one of these, you’re keeping more of your money than you would if you didn’t have any of these options.

Traditional 401(k)

First up is the Traditional 401(k) (or the Traditional 403(b) if you work for a non-profit). This is typically what people are referring to when they talk about an employer’s retirement plan. All of your contributions to your Traditional 401(k) or Traditional 403(b) are tax-free, meaning that if you put in $50 per pay, the full $50 is in the account…because the taxes haven’t been taken out yet.

There are two benefits of putting money into this type of account that you will experience immediately:

1.        You don’t have to pay taxes on that retirement money right now.

2.     It lowers your taxable income for the year.

That second reason is what I want to focus on. Depending on where your income falls within your tax bracket and how much your monthly budget and expenses (bills) will allow you to put away for retirement, you might be able to contribute enough money that it pushes you down into a lower tax bracket. Meaning, your take-home pay would be taxed at a lower percentage than if you hadn’t made those contributions.

Even if you’re not pushed into a lower tax bracket, the dollar amount that you will pay in taxes after everything is said and done will be lower than if you hadn’t contributed to a pre-tax retirement account.

There are some things to remember with these pre-tax accounts, though. First, there are limits on the amount of money you can put into them each year (check out my blog post about retirement plans for more information), which impacts how much you can reduce your taxable income by this method. Second, you will have to pay taxes on this money eventually. This will happen when you are retired and are withdrawing money from that account to pay for your living expenses.

This same concept is true for Traditional IRAs. Traditional IRAs are pre-tax retirement accounts that you can open on your own and are not affiliated with your employer. You can have both a 401(k) through your employer and an IRA at the same time. This account is also restricted on the amount of pre-tax dollars per year you can contribute. And, because your contributions generally are not able to be made through pre-tax deductions in your employer’s payroll system like your 401(k) contributions are, typically these contributions are made from taxed take-home pay first, but then you get that money back when you file your annual federal taxes in April through your tax return.

HSA

The next option to pay less taxes is putting money into an HSA. An HSA is a Health Savings Account that allows you to put in pre-tax dollars to pay for doctor appointments, dental appointments, physical therapy, occupational therapy, dental work, and other IRS-approved medical expenses like prescriptions, over-the-counter medications, and medical equipment. Click here for more on HSAs. For 2025, the maximum contribution for single coverage is $4,300 and $8,550 for family coverage.

HSA’s are commonly attached to employers’ medical benefit plans. A great thing about HSAs, though, is that even if your employer doesn’t offer one through its medical plan, you can open your own!

Just as with 401(k) accounts, because HSAs are funded with pre-tax dollars, it also reduces your taxable income. Another great perk of the HSA is that there is no deadline to use the money, so the money rolls over year after year until you use it.

For most people, having medical expenses throughout the year isn’t a question – it’s just a matter of when. If you’re having to pay for those medical expenses anyway, wouldn’t it be better to pay them with pre-tax dollars so you can use the full amount of those dollars, rather than with post-tax dollars?

To put this in perspective, if you pay for a medical expense with $50 in your HSA account, you have the full $50 available to you because it wasn’t taxed. But, if you use money from your paycheck that has already been taxed, that same $50 taxed is only worth roughly $45-46, depending on your state and city taxes. To make this as clear as possible, by putting money into an HSA, you reduce your taxable income, which saves you money, and you have the full dollar amount of your contribution at your disposal to pay for a doctor’s bill or a bottle of Tylenol, which also saves you money.

FSA

The last strategy for paying less taxes in 2025 is to contribute pre-tax dollars to an FSA. There are two types of FSAs – the medical FSA and the Dependent Care FSA (DCFSA). Let’s start with the medical FSA.

 An FSA (Flexible Spending Account or Flexible Spending Arrangement), according to Healthcare.gov, is another pre-tax savings account that can be offered through your employer’s medical benefits plan to pay for medical and dental costs, as well as prescriptions, over-the-counter medications, and medical equipment. The maximum amount you can contribute to an FSA each year is $3,300.

Along with a smaller contribution limit, the FSA is different from the HSA in that you can only open an FSA if it is offered through your employer and you can only roll over $660 to the next year. Any money over $660 at the end of the year is “use it or lose it”.

The Dependent Care FSA is a similar concept to the medical FSA, but it’s dedicated to paying for expenses related to child care for kids under the age of 13 or adult dependent care (such as a disabled spouse who is not capable of caring for themselves). Approved expenses include before and after-school care, babysitters (for care while at work), nannies, daycare, preschool, summer day camp programs, elder care, registration fees for eligible care, etc.

While you can have a medical care FSA and a Dependent Care FSA at the same time, and an HSA and a Dependent Care FSA at the same time, you cannot have a medical FSA  and an HSA at the same time. The only exception is if you have a Limited Purpose Flexible Spending Account (LPFSA), which has more restrictions than a regular FSA.

Some of these tricks to paying less taxes may be readily available to you while others may not. As we covered, the availability of some of these options depends on whether or not your employer offers them. But, for a couple of them, you can open accounts without your employer. The main takeaway is that everyone should put money into at least one of these tax-incentive accounts to stretch their money as far as possible and pay the least amount of taxes legally possible.