Please note: these are general options you have for reducing your taxable income, and their appearance on this list does not necessarily mean it’s the best option for you. We always recommend speaking directly with a CPA to develop a tax savings strategy that helps you save on taxes while taking into account your overall goals and risk tolerance. If you’re looking for a CPA, set up a meeting with our tax advisors today.
The internet is full of great tax saving options, often a mixture targeting those who are self-employed and those who are not. Here, we’ll walk through tax saving tips for salaried employees (individuals who receive a W2 at the end of each tax year).
The First Step: Tax Savings Now vs. Tax Savings Later
One critical element of strategic tax planning often overlooked by salaried employees is whether to plan for tax savings in the current year or tax savings down the line.
Everything from your retirement account options to savings account types and different types of investment accounts have opportunity for savings in the short term and the long term. Understanding contribution limits and how everything is taxed now and later is just as important as understanding your risk tolerance, short- and long-term goals, and any foreseeable circumstances that will impact your finances and filing. If this thought overwhelms you, know that you’re not alone. Strategic Tax Planning is one of the most high-impact, underutilized services provided by CPAs.
Now, let’s dive into some tax saving tips! To make things easy, we’ve divided this article into three categories:
- Low Effort
- Medium Effort
- High Effort
Low Effort Tax Saving Tips for Salaried Employees
Here are some low-effort ways to lower your tax burden as a traditional employee:
Change Your Withholding on Your W-4
While this doesn’t directly impact your overall tax burden, how much you are withholding throughout the year can have a significant impact on how you approach your finances, how much and where you invest, and how you live in the day-to-day.
- If you aren’t withholding enough, that surprise large tax bill can mean you’re not able to invest as much into your 401k.
- On the other side, if you are withholding too much, you may be unnecessarily struggling throughout the year, and that stress can make you less likely to invest
- Of course, some folks also find having a large refund allows them to place that directly into a tax-saving investment.
One critical thing to remember when approaching taxes and finances is that your emotional state, stress level, and cost of living can all have a direct impact on your comfort level when it comes to claiming tax credits, investing, and other activities.
See if You Are Eligible for the Earned Income Tax Credit (EITC)
Potential Tax Savings for the Current Year (based on 2024): $17,640 – $63,390
The Earned Income Tax Credit is an income-capped tax credit for low- to moderate-income workers (and their families). This credit reduces the actual taxes owed, and the amount can depend on whether you have children, dependents, are disabled, or are military or clergy.
The basic qualifying rules are (as of 2024):
- Earned income under $63,390
- (this is for Married filing jointly with 3 kids; the income threshold can be as low as $17,640 for those filing as Single, Head of Household, or Widowed)
- Investment income below $11,000
- Valid SSN
- U.S. Citizen or Resident Alien
- No Foreign Earned Income
- Filing as Single, Married Filing Jointly, Married Filing Separate, Head of Household, or Qualifying Surviving Spouse
There are additional qualifiers, specifically for the costs associated with keeping up a home (including rent, mortgage interest, food eaten with the home, etc.)
Learn More Here: EITC qualification (via the IRS)
Max Out Contributions
Potential Tax Savings for the Current Year (based on 2024): $37,350 – $42,850 for individuals
This old standby is also a common go-to for salaried workers looking to save on taxes. Maxing out contributions to many accounts you have can save you on taxes now (or even later down the road), including:
- Flexible Spending Account (FSA) – $3,200 contribution limit
- Health Savings Account (HSA) – $4,150 for individuals; $8,300 for families ($1,000 catch up)
- Traditional IRA – $7,000 across ALL IRAs ($1,000 catch up)
- Roth IRA – $7,000 across ALL IRAs ($1,000 catch up)
- 401(k) – $23,000 contribution limit ($3,500 catch up)
Additional opportunities if you have children:
- 529 College Savings Plan – contribution limit depends on state; see 2023 numbers here: 2023 Tax Planning: Education Benefits
You will need to consider (with guidance from a CPA), your current tax bracket vs. what future tax brackets you expect to be in (for example, many individuals contribute post-tax dollars to a Roth IRA if they know they will later be in a higher tax bracket), which accounts impact your burden in what ways, and contribution limits.
Claim All Eligible Tax Credits
Potential Tax Savings for the Current Year (based on 2024): $0 – Tens of Thousands (and more)
The eligible credits for any individual can vary significantly.
Of course, for many, the primary credit and/or deduction will be…
Standard Deduction – amounts adjusted for inflation each year, with slight differences based on personal factors
Additional deductions and credits include
- Itemized Deductions (different from Standard Deduction)
- 401k Contributions
- Traditional IRA Contributions (full amount if your employer does not offer a retirement plan)
- Child Tax Credit
- Home Mortgage Interest
- Charitable Donations
- Rental Property Loss
- Property Taxes
- State Taxes Paid
- Homeowner Deductions
- Medical Expenses
- Lifetime Learning Education Credits
- Student Loan Interest
- Adoption Tax Credit
- Solar Tax Credit
The best course of action to understand which deductions and credits you qualify for is to speak directly with a CPA.
Medium Effort Tax Saving Tips for Salaried Employees
Below are some common strategies for saving on taxes as a W2 employee that require a little more effort.
Learn More About Employer-Sponsored Retirement Options
Potential Tax Savings for the Current Year (based on 2024): $23,000 – $26,500
The employer-sponsored 401(k) is one of the most popular saving methods, but realistically it’s a tax delay. The contributions pulled directly from your salary throughout the year are not taxed in that year. However, down the line, when you withdraw from your 401(k) later, you will be taxed on that as income (though there are no taxes on qualified distributions). Some employers offer a Roth 401(k), in which your contributions are made after taxes, having no impact on your burden for this year, but resulting in tax-free distributions in retirement.
Essentially, it’s important to understand what your employer offers, what your retirement expectations are, and how you anticipate your income to change over time. This is one of the ideal circumstances to speak with a CPA who can help you understand the tax benefits of all your retirement options.
Open an IRA
Potential Tax Savings for the Current Year (based on 2024): $7,000 – $8,000
A traditional IRA offers you a tax break in the current year, delaying those until you begin making minimum distributions.
The limit for contributions to all of your IRAs in totality for 2024 is $7,000 (for those under age 50) and $8,000 (for age 50 and older). Remember, if you have both an IRA and Roth IRA, that contribution cap is for both.
Check Where You Fall Within Tax Brackets
Potential Tax Savings for the Current Year (based on 2024): 2%, 3%, 8%, 10% (depending on your current tax bracket)
One common means of tax savings for W2 employees who know what they expect to make in the coming year is simple tax bracket targeting. While it doesn’t make sense for everyone, some individuals fall on what we call the cusp—typically up to a few thousand dollars away from a lower tax bracket.
For example, if in 2024 an individual makes $50,000 per year, that individual would fall into the 22% tax bracket ($11,000 before credits and deductions are applied). If that individual has not been saving for retirement, or perhaps has a Roth IRA, but not a 401(k), a contribution of $5,275 to a 401(k) or traditional IRA would reduce that income to $44,725, and take the individual from a 22% tax bracket to a 12% tax bracket. Of course, this is based on raw numbers and not adjusted gross income, but we’ve simplified it to illustrate the point.
View tax brackets here: 2024 Tax Brackets
Set up a Tax Strategy Meeting with a CPA
Potential Tax Savings for the Current Year (based on 2024): Maximum Available
The most straightforward way to save on taxes as a salaried employee is to invest in a tax-savings strategy session with a CPA. With this service, we typically sit down with an individual and take a look at their income and spending ecosystem, identify missed credits and deductions in the most recent tax year, offer direct advice on how to direct taxable income to lower the burden, and develop long- and short-term tax goals. In just a handful of hours, it’s not uncommon for our clients to save $2,000-$5,000 and even more on their yearly taxes.
High Effort Tax Savings Tips for Salaried Employees
Plan Out Short-Term and Long-Term Tax Goals
Potential Tax Savings for the Current Year (based on 2024): Maximum Available
As we stated at the head of this article, thinking about tax savings in both the short- and long-term is one of the best ways to optimize your tax burden over the course of your lifetime. This can be daunting when questions like “What do I expect my salary to be in 10 years” and “Do I want my retirement distributions to be taxed as income” come up. However, it’s not uncommon for an individual to be so focused on year-to-year tax savings that they miss out on long-term opportunities to save even more.
Start a Side Business
Potential Tax Savings for the Current Year (based on 2024): Varies
We won’t spend much time on this, since this article is for traditional employees. However, some individuals do enjoy running a side business, whether it’s crypto mining, selling goods through online shops, or creating online content.
Setting up a formal business for your hobby, passion project, or side business can open you up to tax savings like:
- Home office
- Internet and phone
- Meals and travel
- Vehicle use
- Business loan
- Member dues to professional organizations
- Publications and resource materials
- Supplies
- Boards and trade associations
- Education
- Advertising
- Office supplies
- and more
Conclusion
There are many ways to save on taxes as a traditional employee, but it’s important to remember that your tax goals are unique to you, and the more tailored advice you can get, the better. Some individuals find they save tens of thousands due to a change in strategy, while others learn that they are already saving as much as they can, which is also helpful to hear.
No matter your circumstances, know you’re not alone. We, here at Akif CPA are always here to help.
