Reducing Your Tax Bill by Saving Money

In this topic, you'll learn:

• How saving for the future can reduce your current tax bill.
• Why Health Savings Accounts offer tremendous tax advantages.
• Explore retirement plans that offer tax deductible contributions.
• Learn how some savers may qualify for a tax credit.

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When you contribute to a retirement account, you can lower your taxable income, potentially reducing the amount of taxes you owe. But retirement accounts aren’t the only accounts that offer tax benefits. Let’s explore some of the ways you can reduce your tax bill by saving for future expenses.

Health Savings Accounts
Health Savings Accounts (HSAs) are savings plans that offer tremendous tax benefits, although they are not specifically intended as retirement accounts. Contributions are tax-deductible and the funds grow tax-free until you need to use them, be it tomorrow or in 50 years.

To qualify for an HSA account, you must be enrolled in a high-deductible health plan (HDHP). Over half of people with health insurance are enrolled in an HDHP and the number is growing almost every year. In 2025, a HDHP is defined as a health plan with a minimum deductible of $1,650 for individuals and $3,300 for families. Additionally, the out-of-pocket limit for an HDHP is $8,050 for an individual and $16,100 for a family.

If you qualify for an HSA, the benefits are significant. Individuals can contribute up to $4,300 per year, while families can contribute up to $8,550 per year. Moreover, HSA funds can be invested in mutual funds for long-term growth.

You can use your HSA account at any time to pay for a wide range of qualified medical expenses, including deductibles, copayments, and coinsurance for medical care, prescription medications, dental care, vision care, and even long-term medical care in retirement. If you're running short of income after the age of 65, you can withdraw money for any reason, but you will pay income taxes on the amount withdrawn.

It's important to note that HSA accounts are owned by the individual, not the employer, and can be set up at various financial institutions.

Retirement Savings Accounts
Depending on the type of retirement savings account, your annual contribution may be tax-deductible up to certain income limits. Here are some of the plans that qualify:

Traditional Individual Retirement Accounts (IRA)
In 2025, you can contribute up to $7,000 per year ($8,000 if you're 50 or older) and deduct your contributions from your taxable income. This deduction can lower your tax bill now, and your savings grow tax-deferred. However, you will be taxed on withdrawals in retirement.

401(k) or Other Workplace Savings Plans
Another way to reduce your tax bill is to contribute to a 401(k) or other workplace retirement plan. Many employers offer a 401(k) plan, which allows employees to contribute a portion of their pre-tax income to the plan. Like Traditional IRA accounts, these accounts reduce your taxable income up to certain income limits, and the contributions grow tax-deferred until they are withdrawn in retirement. In 2025, you can contribute up to $23,500 plus an extra $7,500 if you're 50 years old or older (for those between the ages of 60 and 63, you can contribute up to $11,250 extra).

In addition to 401(k) plans, other workplace retirement plans like 403(b) plans for non-profit employees and 457 plans for state and local government employees can also be used to reduce taxable income. The maximum contribution is the same as 401(k) plans.

Note that the maximum allowed contributions for retirement accounts may change annually. It's essential to research annual maximums and increase your contribution if possible.

The Saver’s Tax Credit
The Saver's Tax Credit, also known as the Retirement Savings Contributions Credit, is a tax credit that rewards low- to middle-income taxpayers for making contributions to qualified retirement accounts.

The amount of the credit depends on the taxpayer’s filing status, adjusted gross income, and the amount of their retirement contributions. Depending on those factors, the credit is worth between 10% and 50% of the taxpayer’s contribution, up to a maximum credit of $1,000 for individuals or $2,000 for married couples filing jointly.

Unlike tax deductions that reduce the amount of income being taxed, this tax credit is applied directly to income tax liability, which means that it can lower the amount of taxes owed or increase the amount of their tax refund.

To be eligible for the Saver’s Tax Credit, taxpayers must contribute to a qualified retirement account, such as an IRA, 401(k), 403(b), or other retirement plan, and meet the following income requirement requirements (in 2025):

• $79,000 for married couples filing jointly
• $59,250 for head of household
• $39,500 for all other filers

To claim the Saver’s Tax Credit, you must complete Form 8880, Credit for Qualified Retirement Savings Contributions, and attach it to their tax return. Taxpayers who make contributions to a retirement plan through their employer will receive a Form W-2 that shows their contributions. Those who make contributions to an IRA or other self-directed retirement account will need to report their contributions on Form 8880.

The Takeaway
Maximizing your retirement contributions to tax-advantaged accounts is an excellent way to reduce your current taxable income. However, when considering overall tax savings, there are other retirement account options that offer tax-free withdrawals rather than tax-deductible contributions. One example is a Roth IRA, in which contributions are not tax-deductible, but the money grows tax-free, and qualified withdrawals are tax-free.

Whether your tax savings happen now or in the future, long-term saving is one of the keys to financial security.