An unanticipated tax bill can be more than a disappointment — it might even derail your financial plans and delay your goals. While you can't go back in time and change your income and withholdings for last year (outside of some late retirement plan contributions), you can plan ahead to avoid owing next year.
You likely already know the basics — your tax rate is a percentage of your income. So, if you expect to have similar income and expenses as last year, how can you emerge with a different tax bill? Here's a closer look at how your taxes work and what you can do to ensure you get a refund rather than owing next year.
READ MORE: 11 Smart Ways to Get Ready for Tax Season Early
Contribute to Pre-tax Retirement Plans
One way to shrink your taxable income and help your future self is to contribute to a tax-advantaged retirement plan, either through a workplace plan or a traditional IRA. These plans are tax-advantaged, which can lead to major long-term savings.
A tax-advantaged retirement account is a special savings account that helps you save for retirement with extra perks like tax breaks, either on the money you put in (tax deduction) or the earnings you make (tax-free growth or withdrawals).
There are different types of accounts, such as 401(k)s or IRAs, each with its own rules. When you contribute money to these accounts, you may get a tax break either when you put the money in (tax deduction) or when you take it out in retirement (tax-free withdrawals). The account then allows your savings to grow over time, often with investments, without incurring immediate taxes on the gains. This tax advantage is intended to promote long-term savings and financial security during retirement.
For instance, if you have a yearly income of $60,000, your income tax is calculated based on that amount. But if you add $5,000 to a 401(k) or traditional IRA, you can reduce your taxable income to $55,000, meaning you would pay less in taxes for this year. The $5,000 contribution can grow in your IRA until you withdraw in retirement. Contributing to your IRA every year helps build your retirement nest egg while also saving on taxes.
For the 2025 tax year, the annual limit on IRA contributions is $7,000, or $8,000 if you’re age 50 or older. You will owe taxes on traditional IRA withdrawals in retirement, but likely at a lower tax rate than during your prime working years.
With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free, which may appeal to savers who expect to be in a higher tax bracket later in life. If you withdraw from either account before the government-allowed age, you'll owe taxes and additional penalties.
IRA tax benefits
Contributing to a traditional IRA can lower your taxable income for the year you contribute, which may reduce the amount of federal income tax you owe while helping you save for retirement.
Maximize Tax Deductions
The 2025 Reconciliation Act introduced updated tax rules and increased the standard deduction, which is how much you can lower your taxable income by default. You can still itemize deductions if they add up to more than the standard deduction, but you can't claim both the standardized deduction and itemized deductions — it must be one or the other.
Tax deductions lower your taxable income. So a $1,000 deduction doesn't translate to $1,000 off your tax bill. It means your taxes will be calculated on a smaller income, in this example $1,000 less.
For recent tax years, the standard deduction has increased due to inflation, making it especially important to compare the standard deduction with itemized deductions to determine which option lowers your taxable income the most.
Charitable donations
You can deduct contributions to a qualified charity, including the value of items you donate. Limits apply, but donating to nonprofits can feel great while also lowering your tax bill.
HSAs and medical expenses
If you have a tough medical or dental year, you can deduct eligible expenses if they exceed 7.5% of your adjusted gross income. This includes direct medical costs and travel to medical appointments. Either way, if you're eligible to contribute to a health savings account (HSA), you'll qualify for a deduction.
State and local taxes
State and local taxes, sometimes referred to as SALT, are deductible expenses. If you live in an area with high property taxes, your SALT deduction can add up to significant tax savings quickly.
Mortgage interest
If you have a mortgage loan attached to your home, you can generally deduct mortgage interest expenses, including points if you have a new or refinanced mortgage. You may be able to deduct interest from a second mortgage as well. Limits and restrictions apply.
Student loan interest
If you made student loan payments, your student loan interest costs are deductible. As with most deductions, limits apply. You may be able to deduct up to $2,500 in student loan interest, depending on your income and filing status.
Use Tax Credits
Tax credits directly reduce the amount of tax you have to pay. Some credits are refundable, meaning that if you owe no tax, you can be paid the amount of the credit as a refund. Here are a few areas where credits might affect next year's tax bill:
Saver’s credit
If you saved money in a retirement account, you may be eligible for the Saver's Credit. Income limits apply.
Child tax credit
Tax credits such as the Child Tax Credit, Saver’s Credit and education-related credits can directly reduce the amount of tax you owe, and some credits are partially or fully refundable. Income limits apply. If you're considered a middle- to low-income household, you may also qualify for the Earned Income Tax Credit, a refundable tax credit that increases depending on how many kids you have. You can get the credit if you don't have kids, it's just significantly less.
Education tax credits
Interested in furthering your education or career training? It can help next year's tax bill. Qualified education expenses may qualify you for the lifetime learning credit or the American opportunity tax credit.
Next Year's Tax Plan
While you can't predict the future with certainty, you can estimate your income, deductions and credits for next year to plan ahead for tax filing. If you want to avoid owing when you file, reviewing your withholding or estimated tax payments throughout the year can help you stay aligned with what you actually owe. Also, boosting your contributions to a tax-advantaged retirement account can make a huge difference. If you estimate well, you can turn that tax expense into a refund.
READ MORE: What is a Tax Advantaged Account? Types, Benefits & More