Tax Tips for Employees: Make the Most of Your Income

Tax planning isn’t just a year-end task—it’s a smart, ongoing strategy that helps employees take full advantage of deductions, credits, and overall tax savings. As we reach the halfway point of the year, it’s a great time for employees to review their current tax setup and make any necessary adjustments. To help you stay on track and optimize your financial outcomes, here are 10 practical tax tips to make the most of your income and benefits in today’s evolving tax landscape.

Tip #1: Maximize Retirement Contributions

Contributing to retirement accounts like a 401(k) or IRA can reduce your taxable income and help you save for the future. For 2025:

• The contribution limit for 401(k) plans is expected to increase to $23,000 (up from $22,500 in 2024). If you're 50 or older, you can take advantage of catch-up contributions, which will rise to $7,500 in 2025, bringing the total limit to $30,500.

• IRA contribution limits are also expected to increase to $7,000 for individuals under 50 and $8,000 for those 50 and older.

If you haven’t already, consider maxing out your retirement contributions to reduce your taxable income and secure your future.

Tip #2: Take Advantage of Health Savings Accounts (HSAs)

If you're enrolled in a high-deductible health plan (HDHP), an HSA allows you to contribute pre-tax money that can be used for medical expenses. Contributions to an HSA lower your taxable income, and the funds grow tax-free. For 2025:

• The contribution limit for individuals will be $4,300, and for family coverage, it will be $8,550.

• Those 55 or older can contribute an additional $1,000 as a catch-up contribution.

HSAs offer a triple tax benefit: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Tip #3: Consider Flexible Spending Accounts (FSAs)

FSAs allow you to set aside pre-tax dollars for medical or dependent care expenses, reducing your taxable income. In 2025, the FSA contribution limit for healthcare is expected to be $3,050.

The key advantage of an FSA is that you don’t pay taxes on the money you contribute, but keep in mind that the money must be used by the end of the year, unless your employer offers a carryover option or a grace period.

Tip #4: Look into the Child Tax Credit (CTC)

If you have children under the age of 17, you may be eligible for the Child Tax Credit. For 2025, the maximum CTC is expected to remain at $2,000 per qualifying child. The credit phases out at higher income levels, but even middle-income families can benefit significantly from this tax break.

Additionally, the Dependent Care Credit can also help if you pay for childcare. In 2025, the credit is expected to cover up to 35% of qualifying expenses, with limits depending on your income.

Tip #5: Explore Tax Credits for Education Expenses

If you or your dependents are pursuing higher education, take advantage of the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC).

• AOTC provides up to $2,500 per student for the first four years of post-secondary education.

• LLC allows up to $2,000 per taxpayer for qualified education expenses, and there is no limit on the number of years you can claim it.

Keep receipts for tuition, fees, and required books to ensure you don’t miss out on these valuable credits.

Tip 6: Review Your Withholding

Ensure that the correct amount of tax is withheld from your paycheck. Use the IRS Tax Withholding Estimator to calculate whether you should adjust your W-4 form. If you owe a lot at tax time or receive a large refund, it might be worth tweaking your withholding to have more money in your paycheck throughout the year.

Keep in mind that major life changes (e.g., marriage, divorce, the birth of a child) may affect your withholding preferences.

Tip #7: Track Work-Related Expenses (If Eligible)

While the deduction for unreimbursed employee business expenses was largely eliminated for most employees under the Tax Cuts and Jobs Act, certain employees (e.g., those who are self-employed, freelancers, or contract workers) may still be able to deduct work-related expenses, such as:

• Home office expenses (if working remotely or from home)

• Business mileage (using your car for work)

• Supplies, equipment, and software required for your job

Keep detailed records of these expenses and any receipts, as they can help lower your tax bill.

Tip #8: Stay on Top of Capital Gains and Investment Income

If you have investments, understanding capital gains taxes is key. The long-term capital gains tax rate (for assets held longer than a year) will generally be more favorable than short-term rates. In 2025, long-term capital gains rates are expected to stay at 0%, 15%, or 20%, depending on your income.

Consider holding investments for over a year to reduce the tax burden on your gains. You can also offset capital gains with capital losses (known as tax-loss harvesting), which can reduce your overall taxable income.

Tip #9: Review State-Specific Tax Changes

States can have varying tax laws, so be sure to stay aware of any changes in your state or local area. For example:

• Some states have enacted or plan to enact paid family leave or higher taxes on high earners.

• Certain states might offer tax incentives or credits for things like energy-efficient home improvements or electric vehicle purchases.

Keep an eye on your state’s tax changes, as they could impact your overall tax burden.

Tip #10: Consider Charitable Contributions

Charitable contributions can reduce your taxable income if you itemize deductions. In 2025, individuals can deduct up to 60% of their adjusted gross income (AGI) for cash donations to qualifying charities. If you're planning to donate, consider doing so in 2025 and keeping thorough records of your donations.

Additionally, if you’re 70½ or older, you can contribute directly from your IRA to a charity through a Qualified Charitable Distribution (QCD), which counts as a required minimum distribution (RMD) but isn’t taxed as income.

Final Thoughts

Planning ahead and understanding the key tax changes in 2025 can help employees save money and avoid surprises at tax time. Make sure to take advantage of tax-deferred retirement accounts, health savings opportunities, and various credits to maximize your savings. It's always a good idea to consult a tax professional if you're unsure about your specific tax situation.

Sources: SHRM; Merril Lynch