Smart Strategies to Optimize Your Taxes for 2025

ESSENTIAL INSIGHTS

• If your tax refund is less than expected or you owe more, you might be withholding insufficient taxes each paycheck. Update your W4 promptly to align with your financial goals.
• Tax deductions reduce your taxable income, achievable by contributing to traditional retirement accounts like 401(k)s or IRAs.
• Many taxpayers overlook valuable tax credits; using tax software or consulting a professional can ensure you claim all eligible benefits and reduce your tax burden.

Facing a higher tax bill when filing your 2024 taxes? Experts advise adjusting your W4 and utilizing available credits and deductions sooner rather than later to prepare for the 2025 tax season effectively.

Starting your tax review early in the year allows you to make timely adjustments and better anticipate your tax obligations after the 2025 filing period.

"It's increasingly important for individuals to monitor their tax situation throughout the year, whether independently or through multiple consultations with a tax professional," explains Tom O’Saben, Director of Tax Content and Government Relations at the National Association of Tax Preparers.

Adjust Your Withholdings for Optimal Refunds and Payments

Unexpected tax dues or smaller refunds often indicate incorrect withholding amounts. Review your W4 form to understand your current withholdings and adjust them as early as possible to better match your tax liability.

If you owe more than anticipated, consider reducing exemptions or requesting your employer to withhold additional amounts from each paycheck. This approach spreads out your tax payments, avoiding large lump sums at filing time.

"Adjusting withholdings regularly is simpler than scrambling to pay a big tax bill during filing season," O’Saben notes.

Financial expert Ed Mahaffy emphasizes balancing withholding amounts: "Avoid over-withholding to prevent the government from holding your money interest-free for a year. Instead, keep more of your earnings accessible throughout the year."

Conversely, under-withholding risks IRS penalties, including a 5% charge on the underpaid amount. Mahaffy advises a proactive approach: "Estimate your expected income and life changes to set accurate withholding levels."

Leverage Tax Deductions and Credits to Reduce Taxable Income and Owed Taxes

Tax deductions lower your taxable income by accounting for eligible exemptions. Track your qualifying deductions for 2025 and consider actions to increase them, such as contributing to traditional retirement plans or utilizing property tax exemptions where available.

Tax credits directly decrease the amount of tax owed. Explore credits like energy-efficient home improvements or education-related credits such as the American Opportunity Tax Credit or Lifetime Learning Credit, which benefit families saving for higher education.

"Many credits remain underutilized because taxpayers are unaware of them," Mahaffy explains.

Both federal and state governments offer credits to encourage certain behaviors and support households. O’Saben recommends using tax software or consulting professionals to ensure all eligible credits are claimed, preventing overpayment.

"Tax software can demystify the process and reduce anxiety around filing," O’Saben adds.

Note: Ed Mahaffy’s name was corrected in this update on Jan. 2, 2024.

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