As January trudges, many of us have already started receiving the alphabet soup of yearly tax forms. While beginning to organize documents and preparing to file taxes for last year, it also behooves us to think ahead and identify opportunities to cut taxes for the upcoming year. Here are five foundational tax savings strategies that could help you save $20,000 on your taxes in the future. For most of these strategies, it’s not too late to enroll or change your contributions to maximize next year’s tax savings.
While everyone’s situation will vary, to show specific savings, let’s assume a married couple working full-time and earning a combined $240,000 a year. They have one dependent and reside in New York City. Using a calculator from SmartAsset, here is an estimate of their baseline tax liability without implementing any savings strategies
Tax Savings Strategy 1: Fully Fund 401(k) Retirement Contributions
One of the most beneficial tax strategies is fully funding your retirement accounts (aspiring to fund a retirement account fully is also a critical component of achieving long-term financial security). In 2025, the annual contribution limit for employees who participate in a 401(k) plan is $23,500. Money contributed this year to a regular 401(k), as opposed to a Roth 401(k), is tax-deductible and will reduce your 2025 tax liability when you file in 2026.
For the married couple in our example, each can contribute up to $23,500 to their respective 401(k) plans for a total contribution of $47,000. By doing so, they would reduce their tax liability by over $15,000. You’ll notice that it drops their effective, or average, tax rate by over six percentage points, too.
There are other vital considerations that this couple should weigh, including whether it would make sense to contribute to a regular 401(k) and receive the tax deduction now or contribute to a Roth 401(k) and benefit from tax-free growth and no taxes when withdrawing the funds in retirement. But for now, let’s assume they anticipate being in a much higher tax bracket in retirement and find it beneficial to take an upfront tax deduction by funding their regular 401(k).
Tax Savings Strategy 2: Contribute To A Health Savings Account (HSA)
Health savings accounts (HSA) are usually available to employees with high-deductible health plans. HSA dollars can be used to pay doctor’s fees, prescriptions, contact lenses, and other eligible expenses. In 2025, the contribution limit for a family is $8,550. If our married couple fully contributed to their HSA, it would reduce their 2025 tax liability by an additional $2,700.
Health Savings Account contributions roll over from year to year. They are portable, meaning the account is yours even if you leave your employer. The money you keep can also be invested for long-term growth. The beauty of HSA contributions is that they are “triple-tax advantaged,” meaning that you don’t pay taxes on contributions, invested money grows tax-free, and you aren’t taxed when you withdraw the funds as long as they are used for eligible health expenses.
Tax Savings Strategies 3 and 4: Fully Fund Additional Savings Accounts, Such As Limited Flexible Spending and Dependent Care
There are several other accounts that some, but not all, individuals can take advantage of. One is a limited expense health care flexible spending account (LEX-HCFSA for “short”). Those enrolled in an HSA-qualified high-deductible health plan can augment their savings with a LEX HCFSA. “This pre-tax benefit account helps you save on eligible out-of-pocket dental and vision care expenses while taking advantage of the long-term savings power of an HSA,” according to the federal government. The maximum contribution for 2025 is $3,300 per employer, so our married couple could put $6,600 away in this account (note that unlike HSA’s, LEX-HCFSA balances do not fully roll over. They are mainly “use it or lose it” type plans and one can only roll over $660 to the following year).
Similarly, Dependent Care FSAs (DCFSAs) help working adults who have expenses associated with taking care of a dependent, like a child or elderly parent, so that they can work. DCFSAs are used for children under 13, disabled spouses, or older parents in eldercare. It’s important to note that these individuals must reside with you and that you can claim them as dependent on your income tax filing.
In theory, the maximum contribution for a DCFSA is $5,000 per household; however, the limit may be lower for highly compensated employees (HCE), which for 2025 is defined as annual compensation equal to or more than $155,000. In this case, the maximum contribution is $2,250 or less. “Contributions are capped at $2,250 as the result of annual IRS testing to ensure that the DCFSA Plan does not discriminate in favor of ‘highly compensated employees.'”
Let’s assume our married couple contributes $2,250 to a DCFSA. Along with their LEXHCFSA contribution, this would be a total contribution of $8,850, which would further reduce their tax liability by over $2,700.
Contributions to dependent care and limited expense FSA would further reduce the married couple’s tax liability by over $2,700.
Tax Savings Strategy: Contribute To A 529 College Savings Plan
Finally, the couple could reduce their tax liability even more by contributing to a 529 college savings plan. 529 plans offer numerous benefits and help families save for future education expenses. The main draw of these accounts is that contributions grow tax-deferred, and withdrawals are not taxed if the money is used for qualified education costs. However, there is an additional benefit for our purposes because many states, including New York, offer a tax deduction or a credit for contributions, providing immediate tax savings.
It is essential to research the nuances of your state to see if you can receive the deduction or credit for contributing to any 529 plan or if you must contribute to your specific state’s 529 plan. “Nine states—Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania—offer tax parity, which means that investors can deduct their taxable income on contributions made to any plan in the US (most states allow you to take a deduction only if you invest in the state-sponsored plan), according to Morningstar.
New York State allows one to deduct up to $10,000 in 529 contributions each year. For our married couple, this would result in additional net savings of ~$750 by reducing the couple’s state tax liability. While the gross savings would be higher (closer to $1,000), there is an offset that we must consider, which is an increase of roughly $250 in their federal income taxes the following year in which they tax the state tax deduction.
Tax Savings Strategies Conclusion
Our hypothetical married couple could save over $20,000 on their taxes by implementing these five tax strategies.
While savings will differ and depend on each person’s income, state of residence, and other factors, these strategies illustrate the benefit of being more proactive and intentional in our tax planning. It could save you thousands.