How To Lower Your Taxable Income In 2025

The amount you pay the IRS each year is determined by your tax bracket. That, in turn, is based on your taxable income and filing status.

But there are several ways you can lower your taxable income without taking a pay cut — from putting more into retirement to deducting student loan interest.

Below, CNBC Select details five simple ways to shrink your tax bill by reducing your taxable income.

One of the easiest and most beneficial ways to reduce your taxable income is to contribute to a pre-tax retirement account, such as an employer-sponsored 401(k) or traditional IRA.

With pre-tax contributions, you’re essentially taking less out of your disposable income now. Your money grows tax-deferred, though you will have to pay income tax on the funds you withdraw in retirement.

In 2025, the contribution limit for a 401(k) is $23,500, with an additional $7,500 available for those 50 and older. The total contribution limit for traditional and Roth IRAs is $7,000 a year with an additional $1,000 available for those 50 and older.

CNBC Select recommends Charles Schwab’s IRA for its $0 minimum deposit for active investing and its 24-hour access to customer support.

Fidelity Investments doesn’t charge commission fees for stock, ETF and options trades and there are no transaction fees on over 3,400 mutual funds.

Your contributions to a traditional IRA may also be tax-deductible, depending on your income, filing status and whether or not you have an employee-sponsored retirement plan.

“Many people are eligible to deduct their traditional IRA contributions, which can help reduce their tax liability,” said Corbin Blackwell, a certified financial planner (CFP) at Betterment. “Not all IRA contributions are tax-deductible, however. So be sure to work with your tax preparer to understand your situation.”

You can’t take the deduction if you have a retirement plan at work and your income is at least $87,000 as a single filer/head of household, $143,000 as a married couple filing jointly or $10,000 as part of a married couple filing separately.

If you don’t have a retirement plan at work, you can take the full deduction up to your contribution limit.

If you work for a publicly traded company, you may be eligible to enroll in an employee stock purchase plan (ESPP), which allows you to use after-tax dollars from your paycheck toward purchasing shares of your company, typically at a discount on the price (usually around 15%).

You can choose how much you contribute to your ESPP, usually between 1% to 10% of your annual salary, but the limit is $25,000 per year.

The tax advantage comes into play when you decide to sell your shares: While employees can choose to sell immediately after purchase or at a later date, they’re rewarded for holding onto their shares for at least one year from the purchase date.

Selling immediately means you pay ordinary income tax, while selling later means you pay a lower long-term capital gains tax, which reduces your tax burden.

If you’re considering this strategy, make sure you have enough cash to contribute and that the investment fits your overall financial plan. Goals like paying off high-interest debt, saving up an emergency fund or contributing to a 401(k) or IRA (and meeting any employer match) should be the priority.

A health savings account (HSA) allows individuals with a high-deductible health plan to save for upcoming medical expenses.

HSAs offer a triple tax advantage, since funds go in tax-free (or tax-deductible if you opened your own account), can grow tax-free by investing the balance, and can be withdrawn tax-free if used for qualifying medical expenses like deductibles, copays or coinsurance. Plus, any remaining balance on your HSA will roll over from year to year.

The limits of pre-tax funds that can be contributed to an HSA for 2025 are $4,300 for an individual and $8,550 for a family, plus an additional $1,000 if you’re 55 or older.

If your company sponsors an HSA, see if it contributes a set amount or matches employee contributions. Keep in mind that any employer contributions count toward the IRS’ maximum annual limits.

Some employers also offer flexible spending accounts (FSA), which are similar to HSAs in that they reduce your taxable income by allowing pre-tax contributions. But you can’t invest the money you contribute to an FSA and funds typically don’t roll over to the next year. In addition, if you change jobs, you’ll lose that account.

In 2025, the contribution limit for an FSA is $3,300.

If you have private student loans from servicers like SoFi or Earnest, you have been accruing interest throughout the year.

While student loans can be a burden, the interest you’ve paid can be a simple deduction on your taxable income. For 2025, you can deduct up to $2,500. The deduction starts phasing out for single filers if your Modified Adjusted Gross Income (MAGI) exceeds $75,000 and is completely unavailable at $90,000. 

For married couples filing jointly, the phase-out begins at $155,000 and is complete at $185,000 MAGI.

It’s normal to have stocks in your portfolio that aren’t performing well. The good news is you can use a market downturn to your advantage. Known as tax-loss harvesting, this technique involves using your losses to offset the taxes you would pay on other investment gains, otherwise lowering your taxable income.

“Investors can sell losing stocks and realize capital losses, which can be used to offset capital gains,” Amanda Gutierrez, a CFP and financial planning consultant at eMoney Advisor, told CNBC Select. “For those who have no capital gains, those losses can offset up to $3,000 of ordinary income. Any excess losses can carry over to future years and be used to lower taxes.”

While you can certainly implement tax-loss harvesting on your own, it’s easy to do through robo-advisor services from companies like Wealthfront, SoFi Invest and Charles Schwab. They automatically scan for opportunities to harvest losses, reducing investors’ tax exposure throughout the year.

We still suggest talking to your financial advisor about what they recommend as the best tax-harvest strategy for you.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Amanda Gutierrez, a CFP at eMoney Advisor and Corbin Blackwell, a CFP at Betterment.

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