No matter what line of work you’re in, your goal may be to see your income increase from one year to the next. So if that’s exactly what happened in 2024, you may be feeling pretty stoked about your financial prospects in 2025.
But there’s a downside to seeing your income increase. The more money you earn, the more money the IRS might try to take away in tax form.
That’s something it’s important to plan for. So to that end, if your income recently changed (whether for the better or for the worse), it’s a good idea to sit down with a tax professional or financial advisor and map out a strategy. But part of that strategy could include these essential moves.
1. Adjust your tax withholding to avoid an underpayment
When you underpay your taxes, you don’t just land in a situation where you have to write the IRS a check during tax season rather than get a refund. You could also end up being penalized for that underpayment.
If your income rose substantially in 2024 and you don’t expect that to be a limited-time thing, you may want to adjust your withholding this year to have more tax taken out of your paychecks up front. This may require an adjustment to your budget and spending, but it could help you avoid losing money in penalty form.
2. Put more money away for retirement
The more you save for retirement, the more enjoyable your senior years might be. But saving for retirement in the right account — namely, a traditional IRA or 401(k) — could also do the trick of shielding more of your income from taxes.
This year, IRAs max out at $7,000 for people under 50, or $8,000 for those who are 50 or older. With a 401(k), you can contribute up to $23,500 if you’re under 50, or $31,000 if you’re 50 or older. And if you’re between the ages of 60 and 63, you can actually contribute up to $34,750 to a 401(k) plan this year.
If your goal is to lower your 2025 taxes, though, then make sure to stick to a traditional IRA or 401(k) instead of a Roth. A large income boost might take direct Roth IRA contributions off the table anyway, but Roth 401(k)s don’t have income limits.
However, Roth accounts are funded with after-tax dollars. So while savers in these accounts get to enjoy tax-free gains and withdrawals, there’s no immediate tax benefit.
3. Contribute to an HSA or FSA
Healthcare is an expense everyone contends with at some point. If your income went up a lot last year, now’s a good time to sock money away in a health savings account (HSA) or flexible spending account (FSA). Just make sure you understand the differences between the two.
An HSA is a healthcare savings account that lets you invest money you don’t need right away. HSA funds never expire, but your health insurance plan needs to meet certain criteria in order to participate.
An FSA doesn’t let you invest unused funds, and if you don’t use up your balance every year, you risk forfeiting it. However, FSA eligibility doesn’t hinge on your health plan, so it’s much easier to fund one.
Both HSAs and FSAs allow you to contribute funds on a pre-tax basis like traditional IRAs and 401(k). So they’re another good way to shield income from the IRS at a time when your paycheck is higher than what it used to be.
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