How to Pay Less Taxes In 2025 – A Complete Guide

Let’s talk about how to pay less taxes, a goal that impacts your finances more than you might think.

The average person will pay 30-35% of their income towards taxes. That is almost ⅓ of your working life spent towards paying taxes.

Fortunately, the tax code provides several ways to reduce your taxes as of 2025.

It starts with understanding how your income affects your tax bill. 

Then you can begin to use specific tax strategies to reduce the amount of income you have to report.

 When you report less income, you pay less taxes.

In this guide, you will discover the best ways to keep more of your money by paying less in taxes.

Understand Your Tax Bracket

Understanding your tax bracket is a key part of learning how to pay less taxes.

According to these brackets, the more money you make, the higher the percentage you will pay on some of that income.  

When your income increases, you enter a higher tax bracket, but only the excess income is taxed at the higher rate.

Your existing income continues to be taxed at the lower rate it originally qualified for.

This is why knowing your bracket when tax planning is essential; it can influence decisions that might affect how much tax you will owe.

Here is a closer look at the 2025 tax brackets for different income levels:

2025 tax brackets (taxes due April 2026 or October 2026 with an extension)
Tax Rate	Single	Married Filing Jointly or Surviving Spouse	Head of Household	Married Filing Separately
10%	$0 to $11,925	$0 to $23,850	$0 to $17,000	$0 to $11,925
12%	$11,926 to $48,475	$23,851 to $96,950	$17,001 to $64,850	$11,926 to $48,475
22%	$48,476 to $103,350	$96,951 to $206,700	$64,851 to $103,350	$48,476 to $103,350
24%	$103,351 to $197,300	$206,701 to $394,600	$103,351 to $197,300	$103,351 to $197,300
32%	$197,301 to $250,525	$394,601 to $501,050	$197,301 to $250,500	$197,301 to $250,525
35%	$250,526 to $626,350	$501,051 to $751,600	$250,501 to $626,350	$250,526 to $375,800
37%	$626,351 or more	$751,601 or more	$626,351 or more	$375,801 or more
Source: Internal Revenue Service

The Value of a Tax Deduction

A tax deduction allows you to reduce your taxable income. 

If you are in the 32% marginal tax bracket and get a $10,000 tax deduction, you may save $3,200 in taxes. 

By understanding which bracket you are in, you can better manage your taxes and reduce the amount of tax you owe through various deductions and financial planning strategies.

Maximize Your Individual Tax Deductions

You have two main options when reducing your taxable income: taking the standard deduction or itemizing your deductions. 

Understanding the differences between these options can help you choose the best path forward in how to pay less taxes.

A standard deduction is a fixed amount that reduces the income you are taxed on. 

For 2025, the standard deduction is $15,000 for singles and $30,000 for married couples filing jointly. 

It is simple and easy because you do not need to provide any proof of expenses.

Alternatively, you can choose to itemize your deductions if your total qualifying expenses exceed the standard deduction amount. 

Common itemized deductions include mortgage interest, state and local taxes, medical expenses, and charitable contributions. 

Itemizing requires keeping detailed records and receipts of your expenses.

Choosing between the standard deduction and itemizing depends on which option gives you the lower tax bill. 

If your itemized deductions add up to more than the standard deduction, itemizing will save you more money on taxes. 

However, if your itemized deductions are less than the standard deduction, it is better to choose the standard option for simplicity and maximum tax benefit.

Consider Contributions to Tax-Deferred Accounts

You can save on taxes by putting more money into tax-deferred accounts like your 401(k), IRA, and HSA. 

These accounts can be essential tools in how to pay less taxes while planning for long-term financial security.

Here is how each one works:

A 401(k) might be available through your W2 job or business. 

You can contribute a part of your salary before taxes are taken out, which means you will pay less in taxes. 

For 2025, you can contribute up to $23,000. 

If you are 50 or older, you can contribute an additional  $7,500, making it $30,500 in total.

Self-employed individuals may be able to contribute up to $46,000 more towards their 401K through the use of a Solo 401K or SEP IRA.

An IRA (Individual Retirement Account), on the other hand, lets you save money for later in life with some nice tax breaks. 

When using a Traditional IRA, you can deduct the amount you contribute from your income, which lowers your tax bill. 

The limit for 2025 is $7,000, or $8,000 if you are over 50.

In addition to retirement account, if your health plan has a high deductible, you may benefit from an HSA (Health Savings Account). 

You contribute money before tax, which reduces your taxable income. 

Plus, the money grows tax-free, and you can use it tax-free on medical expenses. 

The contribution limits for 2025 are $4,300 for individuals and $8,550 for families.

By maxing out your contributions to these accounts, you are not just saving tax now, you are setting yourself up for a more secure future financially.

Qualify for Business Deductions

If you have a side hustle, work as a 1099 contractor, or run your own business, there are several deductions you can take advantage of to reduce your taxable income. 

Knowing which deductions apply to your situation is one of the most practical ways to learn how to pay less taxes as a business owner or freelancer.

Let’s review some common ones:

• Home office: If you regularly use part of your home exclusively for business, you may deduct expenses related to that portion of your home. 

This could include a portion of your rent, mortgage, utilities, and internet costs.

• Car expenses: When you use your vehicle for business, you can deduct related expenses. 

You have two options: track all expenses (gas, maintenance, insurance, etc.) and deduct the percentage used for business, or use the standard mileage rate, which is .70 cents per mile for 2025.

• Travel: You can deduct travel expenses that are necessary for your business. 

This includes airfare, hotel stays, and transportation costs incurred while working.

• Meals: When you eat out for business meetings or travel, you can deduct 50% to 100% of the meal costs. 

Just ensure these expenses are reasonable and business-related.

• Health insurance: If you are self-employed, you might be able to deduct the premiums you pay for medical, dental, and some long-term care insurance for yourself, your spouse, and dependents.

If the IRS checks your filings, detailed documentation will be required to support these deductions.

Change How Your Income Is Taxed

By modifying your tax classification or employment setup, you can reduce your tax rate and gain new deductions, ultimately keeping more money in your pocket.

These changes are some of the most effective ways to learn how to pay less taxes as a high-income earner or business owner.

Here’s how:

Adjust Your W-2 Withholdings

If you are a traditional employee, taxes are typically withheld from each paycheck.

However, if you receive a large refund during tax season, that means you have given the IRS an interest-free loan for the year.

Instead of allowing the IRS to hold your money without interest, adjust your W-4 withholdings to better align with your actual tax liability.

This way, you will receive more take-home pay with each paycheck. You can invest or save this additional income.

For example, if you overpay by $5,000 throughout the year and receive that back as a refund, you have essentially missed out on earning 4–5% in interest or returns on that money.

Elect S Corp or C Corp Status

If you are a business owner or freelancer, changing your entity type can significantly impact your tax liability.

Sole proprietors and single-member LLCs typically pay self-employment tax (15.3%) on all business profits.

However, by electing S Corporation status, you can split your income between a reasonable salary (which is subject to self-employment tax) and distributions (which are not).

For instance, if you earn $100,000 and pay yourself a $50,000 salary, only that amount is subject to payroll taxes.

The remaining $50,000 can be taken as a distribution, potentially saving you over $7,500 in taxes each year.

Alternatively, forming a C Corporation may be better suited for businesses planning to reinvest their profits rather than distributing them.

C Corporations are taxed at a flat 21% corporate rate, allowing them to defer personal taxation until dividends are paid.

Claim Day Trader Status

If you actively engage in stock market trading and meet IRS criteria, electing trader tax status can transform your gains and losses into business income and expenses.

As a qualified day trader, your trading activities are treated as a business, meaning you can deduct costs not available to regular investors such as:

• Home office space
• Trading software
• Subscriptions
• Internet expenses
• Educational costs

Additionally, qualified traders can use Section 475(f) to mark gains and losses to the market, thereby bypassing wash sale rules and potentially improving tax outcomes.

Real Estate Professional Status

The IRS generally considers most rental real estate activities as passive, which limits your ability to deduct losses against other income.

However, by qualifying as a real estate professional, you can reclassify your rental activities as non-passive, opening up deductions.

Once you qualify, losses from depreciation or expenses can offset active income, such as wages or business profits.

For example, if you earn $200,000 from your business and have $50,000 in paper losses from rental depreciation, being a real estate professional allows those losses to reduce your taxable income to $150,000, potentially saving you over $15,000 in taxes, depending on your tax bracket.

Create Rental Losses to Offset Taxable Income

If you want to see how to pay less taxes, another effective way is using rental real estate losses to reduce your overall taxable income.

The IRS allows property owners to deduct expenses related to operating and maintaining rental properties.

When these expenses exceed the income you earn from rent, the result is a net rental loss. And due depreciation tax provisions, it is common for real estate investors to report rental losses.

Under the right conditions, you can use rental losses to lower your tax bill on other income.

What Counts as a Rental Loss?

A rental loss occurs when your expenses exceed rental income, with deductible expenses including mortgage interest, property taxes, depreciation, repairs, insurance, utilities, and management fees.

For example, if your rental property earns $20,000 in income but has $30,000 in expenses, you have a $10,000 rental loss that can offset other income (such as W-2 wages, business income, or investment gains) and lower your tax bill.

Using Rental Losses to Offset Passive Income

The IRS automatically classifies rental real estate activities as passive.

This means that any losses generated from these activities can only offset passive income, such as:

• Income from other rental properties
• Earnings from limited partnerships
• Royalties or passive investment ventures

If your rental property generates a loss, commonly due to depreciation, maintenance, or interest expenses, these losses can reduce the taxable amount of your other passive income.

This allows you to defer or eliminate taxes on your passive cash flow.

Maximizing depreciation is key for increasing losses, allowing for larger deductions. 

Using Rental Losses to Offset Active Income

There are instances where the IRS allows rental losses to offset active income.

Active income is generally considered “earned income”. It includes W-2 income, self-employment income, and related working income.

In general, the IRS considers rental activities to be “active income” when you meet any of the following criteria:

• You operate a short-term rental with an average guest stay of 7 days or less
• You qualify for the real estate professional tax status, or
• You operate your rental business as a C-Corporation

There are several tax provisions and rules to consider to successfully achieve this. If interested, it is advisable to work with a tax CPA to help you with this.

Investment Tax Strategies

Your investment strategy may also help you pay less taxes to the government.

The IRS rewards long-term investors with lower tax rates, allowing you to keep more of your money.

Here are four effective strategies to consider this year.

Invest for Long-Term Capital Gains

The tax you owe on capital gains depends on how long you hold an asset before selling it.

If you sell an asset held for one year or less, it is taxed as a short-term capital gain, which can be as high as 37%.

If you hold the asset for more than a year, it becomes a long-term capital gain, taxed at lower rates of 0%, 15%, or 20%, depending on your tax bracket.

For high-income earners, this strategy can significantly reduce tax burdens.

For instance, if you are in the 37% tax bracket and sell a stock after 10 months for a $100,000 gain, your tax bill would be $37,000.

However, if you wait two more months to qualify for long-term capital gains, your bill could drop to $20,000, resulting in a savings of $17,000.

While this approach may not be suitable for everyone, especially if you need immediate liquidity, waiting to qualify for long-term capital gains can be a powerful tax reduction strategy.

Time Your Investment Gains

The timing of when you sell your investments is as important as how long you hold them.

If you anticipate a lower income year due to a job change, retirement, or business fluctuations, it may be wise to delay selling until you are in a lower tax bracket.

This can reduce the tax rate on your capital gains, potentially saving you money.

Let’s say you are a small business owner who usually earns $300,000 per year, putting you in the 20% long-term capital gains tax bracket.

However, if you anticipate earning only $90,000 next year, you can benefit from timing your stock sales.

Selling appreciated stock this year would incur a 20% tax on gains, but waiting until next year might lower your tax rate to 15% or even 0% if your income falls within the lowest capital gains threshold.

This timing flexibility gives you more control over how much tax you pay on your investment profits.

Borrowing Against Your Investments

Another advanced tax-saving strategy is to borrow against your investments instead of selling them.

Selling triggers capital gains tax on profits, but with a margin loan or a securities-backed line of credit, you can access cash without triggering taxable income.

Since loan proceeds are not considered income, you will not owe taxes on the borrowed amount.

This makes borrowing against your investments a strategic move when exploring how to pay less taxes while maintaining your portfolio’s growth potential.

If used for business or investment, the interest may also be deductible, making this approach beneficial for high-net-worth individuals who want to fund new ventures while keeping their portfolios intact.

For example, if you have $500,000 in appreciated stock and need $200,000 for a business opportunity, borrowing against the portfolio allows you to defer taxes and retain ownership.

However, this strategy carries risks; a significant decline in your portfolio’s value may lead to a margin call, forcing a sale at a loss.

Always consult a financial advisor before using leverage in your tax strategy.

Harvesting Investment Losses

When managing investments, leveraging losses can be as effective as capturing profits.

This strategy, known as tax-loss harvesting, involves selling investments that have dropped in value to realize a capital loss, which can reduce your taxable income.

Every time you sell an investment, it triggers a taxable event.

Selling at a loss generates a capital loss, which can offset gains in your portfolio or allow you to deduct up to $3,000 of ordinary income per year if your losses exceed your gains.

Remaining losses can be carried forward indefinitely to offset future gains.

This strategy is particularly beneficial for high-income earners in upper tax brackets, helping to reduce their tax burden and increase after-tax returns.

Real estate: If you own rental property, you can utilize depreciation as a non-cash deduction, which can create a paper loss that offsets other income, thereby reducing your tax bill.

Stock trading: For those actively investing in taxable brokerage accounts, selling losing positions can help offset gains.

Keep in mind to adhere to the wash sale rule, which prevents buying the same or “substantially identical” investment within 30 days before or after the sale; violating this rule can disallow your loss.

Things to Remember:

Tax-loss harvesting applies only to taxable accounts, not to tax-advantaged accounts such as 401(k)s and IRAs.

The strategy is more beneficial in higher tax brackets.

Annual reviews of your portfolio are wise, particularly for high-net-worth individuals with significant gains.

While no one enjoys taking losses, converting them into tax savings can help mitigate the impact and keep more of your money working for you.

Earning Tax-Free Income

Earning tax-free income can significantly enhance your financial strategy, particularly in 2025, as tax brackets affect high earners.

It is a powerful example of how to pay less taxes while still growing your wealth.

Unlike taxable income, tax-free income compounds without interruption, helping you build wealth more quickly.

By shifting more of your earnings into tax-free sources, you can reduce your taxable income year after year, an essential part of understanding how to pay less taxes legally and efficiently.

The IRS offers various ways to receive income without federal taxes and sometimes state taxes as well.

Here’s how to get started:

Roth Retirement Accounts

Retirement Roth IRAs and Roth 401(k)s can be among the most effective tax-free investment vehicles available today.

Unlike traditional retirement accounts, which offer a tax deduction upfront but tax you on withdrawals later, Roth accounts operate oppositely.

You contribute after-tax dollars now, and all future growth and withdrawals are tax-free as long as specific requirements are met (such as being at least 59½ years old and having held the account for at least five years).

This structure makes Roth accounts particularly valuable for high earners who expect to remain in the same or higher tax bracket during retirement.

For example, if you contribute $10,000 to a Roth IRA in 2025 and it grows to $100,000 over 30 years, you can withdraw the entire $100,000 tax-free in retirement.

That means $90,000 in untaxed growth.

529 College Savings Plans

If you are saving for a child’s education (or your own), 529 college savings plans are a smart, tax-advantaged option.

You contribute after-tax dollars to a 529 account.

The investments inside grow tax-deferred, and when the funds are used for qualified education expenses, such as tuition, books, and room and board, the withdrawals are entirely tax-free.

Recent changes also allow you to use up to $10,000 per year for K–12 tuition.

Cash Value Life Insurance

Cash value life insurance (such as whole life or indexed universal life) provides both insurance protection and a tax-deferred growth component.

A portion of your premium builds cash value over time.

You can withdraw your original contributions tax-free or take out policy loans against your cash value, also tax-free, as long as the policy remains in force.

These features make cash value life insurance a flexible source of tax-free supplemental retirement income, emergency funds, or liquidity for large expenses.

For example, a high-income earner might contribute $20,000 per year into a permanent life insurance policy and, over time, accumulate hundreds of thousands of dollars in tax-free, accessible cash without triggering capital gains or income tax.

Municipal Bonds

Municipal bonds (munis) are debt instruments issued by state and local governments to finance public projects, such as schools and infrastructure.

The interest earned from most municipal bonds is exempt from federal income tax.

If you live in the state issuing the bond, you may also avoid state and local taxes.

This makes municipal bonds especially attractive to investors in high-tax states.

U.S. Treasury Securities

The federal government backs Treasury securities (like T-bills, T-notes, and T-bonds).

While the interest is taxable at the federal level, it is exempt from state and local income taxes, a key benefit for residents in high-tax states.

Incorporating treasuries into your portfolio can help preserve capital and generate stable, tax-efficient income.

Health Savings Accounts (HSAs)

HSAs offer a unique triple tax benefit:

1. Contributions are tax-deductible.
2. Growth is tax-deferred.
3. Withdrawals are tax-free when used for qualified medical expenses.

Used effectively, HSAs can serve as a secondary retirement account, providing tax-free funds for future healthcare needs.

Life Insurance Proceeds

When a loved one passes away, and you receive a life insurance payout, that lump sum is not subject to federal income tax.

This makes life insurance a smart estate planning tool for preserving wealth and leaving a tax-free legacy.

Gifts and Inheritances

If you receive a gift or inheritance, you generally do not owe income tax on the amount received.

While large estates may incur estate taxes, the individual beneficiary typically receives their inheritance tax-free.

For 2025, the federal gift and estate tax exemptions allow for significant transfers without incurring taxes, making estate planning strategies more effective.

These sources of tax-free income can be an essential part of your overall financial planning, providing relief from your annual tax liabilities and enabling more effective wealth accumulation.

Qualifying for Tax Credits

Tax credits are valuable tools in reducing your tax bill because they provide a dollar-for-dollar reduction on the amount of taxes you owe. 

Unlike deductions, which lower the income subject to tax, credits directly reduce your tax liability.

Tax credits are a great example of how to pay less taxes because they reduce what you owe instead of just lowering your taxable income.

Common Individual Tax Credits

1. Child Tax Credit

The Child Tax Credit provides a credit for each qualifying child, which can significantly reduce your tax liability.

To qualify for the Child Tax Credit, each child must:

• Have a Social Security number valid for U.S. employment.
• Be younger than 17 at the end of the tax year.
• Be any son, daughter, foster child, sibling, or your direct descendants.
• Not be financially independent.
• Have resided with you for more than half the year.
• Be listed as a dependent on your tax return.
• Be a U.S. citizen, national, or resident.

The income limits for the full credit are $200,000 individually or $400,000 for joint filers.

2. Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is designed for low to moderate-income earners, and this credit can reduce your taxes and potentially lead to a refund.

To qualify for the EITC, you must:

• Be a low-to-moderate income earner.
• Have what qualifies as earned income.

3. Education Credits

By claiming an Education Credit, you can reduce the amount of tax you owe.  

This credit is designed to help manage the costs associated with higher education, directly reducing your tax obligations.

If an education credit brings your tax liability below zero, you could be eligible to receive a refund for the excess amount.

You can avail of two education credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

There are additional rules for each credit, but you must meet all three of the following for both:

• You, your dependent, or another party must pay qualified higher education expenses.
• The student must be enrolled at an eligible educational institution.
• The student should be either you, your spouse, or a dependent listed on your tax return.

4. Energy Credits

If you make energy-efficient improvements to your home, you might qualify for Energy Credits.

You can receive a 30% credit for specified expenses such as energy efficiency improvements, residential energy costs, and home energy evaluations. 

The credit stipulates annual maximums, including $1,200 for typical energy expenses and specific limits on doors, windows, and audits. 

A higher cap of $2,000 is available for heat pumps and biomass systems. 

Energy credits have no lifetime dollar limit. 

You can claim the maximum annual credit every year that you make eligible improvements until 2033. 

Common Business Tax Credits

1) Research and Development Tax Credit  

The Research and Development (R&D) Tax Credit is a tax break that all companies, from small businesses and startups to large corporations, can get if they spend money trying to create new products or improve existing ones. 

For a company to qualify for the R&D Tax Credit, the work they do must:

• Have the goal of creating something new or improving an existing product/process
• Involve experimenting and testing different options
• Use science, engineering, or computer technologies
• Try to overcome technical uncertainties or challenges

Activities that may qualify include developing new software, designing new products, creating innovative manufacturing processes, and more.

To claim the R&D Tax Credit, a company should file Form 6765 when they do their taxes. 

This allows them to get money back based on how much they spent on qualified research and development activities.

2) Work Opportunity Credit

If any of your employees have faced challenges finding jobs in the past, you may qualify for the Work Opportunity Credit. 

Examples include veterans, people with disabilities, and those who were previously in prison.

The exact amount depends on the worker’s pay, how long they worked, and which group they belong to. 

The maximum credit for most employers is usually $2,400 per worker.

There are a few steps on how to claim this credit:

Within 28 days of the employee’s start,, you must file Form 8850 with your state agency to confirm if the employee qualifies for the credit.

Next, you will claim the credit on your tax return, Form 1040, and file either Form 3800 or Form 5884, depending on your income sources.

3) Qualified Plug-In Credit

The IRS offers tax credits for small businesses to help make electric vehicles more affordable.

These credits apply to electric cars, trucks, and even two-wheeled vehicles like motorcycles and scooters. 

To claim the Qualified Plug-In Electric Drive Motor Vehicle Credit, you must file Form 8936 with your tax return.

To qualify, the vehicle must meet specific requirements, including battery capacity. 

For vehicles purchased in 2022 or earlier, the credit amount is based on the battery size:

• $2,917 for a battery of at least 5 kilowatt hours (kWh)
• An additional $417 for each kWh over 5 kWh, up to a maximum of $7,500

This credit is non-refundable, which means it can only be applied to the amount of taxes you owe for the year. 

Any unused portion cannot be refunded or carried forward to future tax years.

To qualify, the vehicle must be:

• Purchased new for your own use, not for resale
• Primarily driven in the United States
• From a manufacturer that has sold less than 200,000 electric vehicles 

4) Employer SS and Medicare for Employee Tips

Some small businesses can claim tax credits for the Social Security and Medicare taxes they pay on their employees’ tip income. 

This credit is reported on Form 8846.

To claim this credit, the business must operate an establishment where tipping customers for food/beverage service is customary and common.

So restaurants, bars, coffee shops, and similar businesses can get a tax credit to offset some of the payroll taxes they pay on the tips their staff receives from customers. 

However, this credit does not apply to the payroll taxes paid on the employee’s regular wages.

The tip credit allows these small service businesses to benefit from a tax reduction due to the additional payroll tax burden of their staff earning tip income in addition to their regular hourly pay. 

It is important to note that it only covers the employer’s share of taxes on those tips.

Bottom Line

Reducing the amount of tax you owe is possible by becoming familiar with the tax system and using legal strategies. 

Whether it is figuring out your tax brackets, picking the best deductions, or making full use of tax credits and tax-deferred accounts, each step helps reduce your tax bill. 

And remember, proper recordkeeping and strategic planning are key to nailing this. 

We have your back if you are ready to keep more of what you earn this year! 

Our team is all about optimizing your tax obligations with effective planning. 

Apply to become a client today, and let’s start making your financial planning easier and more beneficial.