Personal Finance

I'm working in tech with a rising W-2 income — how can I reduce my taxable income as I earn more?

Maurie Backman

Published: December 23, 2024 12:54 pm

Key Points from 24/7 Wall St.

• The more you earn, the more money you might owe the IRS.
• Max out tax-advantaged accounts like 401(k)s and HSAs.
• Ramp up charitable contributions and harvest investment losses.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

When you’re growing your career, seeing your income rise is a definite win. But earning more money can pose some challenges from a tax perspective.

Such is the plight of the author of this Reddit post I stumbled upon. The author’s income is growing significantly, and they want to know what they can do reduce to reduce the amount of money they owe the IRS.

So let’s get one thing out of the way. This is a good problem to have. But that doesn’t mean that paying a boatload of taxes is fun, or that it’s something you should resign yourself to if you’re in a similar situation. So it’s important to have strategies to reduce your taxable income.

Ways to legally pay the IRS less

The U.S. tax code is a marginal one that imposes a higher rate of tax on your highest dollars of earnings. If your income increases substantially, you may end up having to pay the IRS a lot more than ever before.

To avoid a major crunch, one thing you may want to do is increase your withholding so you’re paying more tax upfront. If you’re earning a lot of income outside of your regular paycheck, you may also want to make estimated tax payments during the year to avoid a giant IRS bill the following April.

It’s also a good idea to maximize tax-advantaged savings plans that legally let you shield income from taxes. If your employer offers a 401(k), that’s a good place to start, as you’ll enjoy a generous contribution limit of $23,000 for 2024 and $23,500 for 2025 if you’re under the age of 50. If a 401(k) isn’t available to you, aim to max out an IRA at $7,000, assuming you’re not yet 50.

But also look outside of retirement-specific accounts to shield income from taxes. If you qualify for an HSA, contribute the maximum amount possible (and while you’re at it, aim to leave that money alone as long as possible so it grows tax-free). And if your health insurance plan isn’t compatible with an HSA, see if your employer offers an FSA you can fund.

On top of that, get creative about taking deductions. Increasing the amount of money you donate to charity could result in a larger tax write-off. So could strategically dumping losing investments in a taxable brokerage account.

I’d also be remiss if I didn’t mention homeownership as a potentially huge tax deduction between mortgage interest and property taxes. But I’ll also caution that owning a home is a lot of work, and I generally would not advise buying a home simply to get a tax break.

Get professional help

The U.S. tax code is complicated and loaded with rules. If you’re eager to reduce your taxable income, it could help to speak with a professional for customized advice.

In this regard, you have choices. You could work with a financial advisor, or, if you feel you have a good handle on investing, hire a CPA or tax professional to review your situation. You may even want a combination of both, which isn’t a bad idea at all.