20 Ways to Legally Reduce Your Taxable Income

Reducing your taxable income within the law is a game of strategy, with savvy financial moves, such as optimizing retirement savings, using deductions, and qualifying for tax credits, sacrificing thousands. As an employee, independent contractor, or investor, there are compelling ways to lower your tax liability and remain completely within IRS regulations. By learning and using these strategies, you can retain more of your earnings, accumulate more wealth, and have tax season working for you.

1. Make a Contribution to a 401(k) or 403(b) Plan

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Contributions to employer-sponsored retirement plans made before taxes lower your taxable income. This year, the maximum is $23,000 (or $30,500 if you’re 50 or older). Employees who make $80,000 and contribute $10,000 decrease their taxable income to $70,000, lowering their tax bill right away.

2. Establish and Contribute to a Traditional IRA

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A regular IRA permits tax-deductible contributions of up to $7,000 ($8,000 if 50+). If you make $75,000 and contribute $6,000, your taxable income is $69,000. Deductibility, however, varies based on your income and whether you have a retirement plan through work.

3. Leverage the Standard Deduction

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This year, the standard deduction is $14,600 (single) and $29,200 (joint filing). If you make $50,000 and claim the standard deduction, you’re only taxed on $35,400. It’s a simple way to lower taxable income without complicated itemization.

4. Maximize Health Savings Account (HSA) Contributions

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If you have a high-deductible health plan (HDHP), you can contribute as much as $4,150 (individual) or $8,300 (family) tax-free. A couple contributing $8,300 reduces their taxable income by that amount and saves for medical bills. HSAs increase tax-free, and withdrawals for medical bills are tax-free.  

5. Use a Flexible Spending Account (FSA)

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FSAs allow you to contribute pre-tax dollars ($3,200 in 2025) towards medical costs. If you place $2,500 in an FSA and are in a 22% tax bracket, you save $550 in tax. FSAs are use-it-or-lose-it, so use spending wisely.

6. Deduct Student Loan Interest

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You can claim up to $2,500 in student loan interest if your modified adjusted gross income (MAGI) is under $90,000 ($185,000 for joint filers). If you paid $2,000 in interest, your taxable income decreases by that much. You get this deduction even if you don’t itemize.  

7. Take the Earned Income Tax Credit (EITC)

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The EITC benefits low-to-moderate-income earners, with a maximum credit of $7,830 for families with three kids in 2025. If you’re a single parent earning $25,000, this credit could significantly reduce your tax burden. Unlike deductions, the EITC is refundable, meaning you get money back even if your tax liability is zero.  

8. Utilize the Child Tax Credit (CTC)

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For 2025, the Child Tax Credit is $2,000 per child under age 17. If you have two children, this lowers your tax bill by $4,000. As much as $1,500 per child is refundable, so you can receive a refund even if you owe no tax.

9. Save for College through a 529 College Savings Plan

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A 529 plan enables tax-free growth if applied toward education costs, and contributions can be tax-deductible in many states. For instance, in New York, state residents can deduct a maximum of $10,000 (married) from taxes. Although there’s no deduction from federal taxes, your investments earn tax-free interest.  

10. Claim the American Opportunity Tax Credit (AOTC)

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The AOTC offers up to $2,500 per student for tuition and fees in the first four years of college. If you pay $4,000 in tuition, you can receive a $2,500 tax credit. Moreover, $1,000 is refundable, so it can boost your refund even if you owe no tax.

11. Deduct Home Mortgage Interest

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If you deduct, you can deduct mortgage interest up to $750,000. If you have $10,000 of mortgage interest and are in the 24% bracket, you save $2,400. This deduction is particularly valuable for high-cost-area homeowners.

12. Deduct State and Local Taxes (SALT)

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You can deduct state and local income, sales, and property taxes up to $10,000. If your property and state taxes are $8,500, you can deduct that from your tax income. This is especially useful in high-taxing states such as New York and California.

13. Deduct Charitable Contributions

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You can subtract donations up to 60% of your adjusted gross income (AGI) if you itemize. Contributing $5,000 to a qualified charity lowers your taxable income by $5,000. Save receipts or donation acknowledgments for IRS purposes.

14. Take Advantage of the Saver’s Credit

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You might be eligible for the Saver’s Credit if you make less than $76,500 (filing jointly) or $38,250 (filing individually) and contribute to a retirement plan. This credit amounts to $1,000 ($2,000 for couples). A lower-paid worker saving $2,000 in a 401(k) could receive a $1,000 tax credit in addition to their tax savings.

15. Invest in Municipal Bonds

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Interest on municipal bonds is tax-free federally and occasionally state tax-free. If you’re in the 24% tax bracket and take home $5,000 in muni bond interest, you save $1,200 in taxes over taxable bonds. This is an excellent tax-effective investment for high-income individuals.

16. Deduct Business Expenses as a Freelancer

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If you are self-employed, you can write off home office expenses, internet, business meals, and equipment. A freelance writer making $50,000 who incurs $5,000 in business expenses pays taxes on $45,000 instead. Just keep good records in case of an audit.

17. Write Off Work-Related Education Expenses

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If courses or certifications enhance your skills in your present work, you can deduct as much as $4,000 in tuition and fees. A graphic designer who spends $2,500 on an advanced design course can lower taxable income by that amount. This deduction doesn’t need itemizing.

18. Use a Dependent Care FSA

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A Dependent Care FSA allows you to contribute up to $5,000 pre-tax for dependent or child care costs. A couple in the 22% tax bracket saves $1,100 by contributing the maximum. This is particularly useful for working parents with daycare costs.

19. Defer Income with a 1031 Exchange

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Real estate investors can put off capital gains taxes by performing a 1031 exchange to reinvest proceeds in another property. If you sell a rental property for $300,000 and reinvest, you don’t have to pay capital gains tax until you sell out. This technique causes investors to accumulate wealth tax-free for many years.

20. Harvest Investment Losses to Offset Gains

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If you lose money on stocks, you can apply those losses against capital gains (or deduct up to $3,000 against other income). If you have $5,000 in capital gains but sell another stock for a $5,000 loss, your taxable capital gains are zero. This is tax-loss harvesting and is a popular technique among investors.

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