How To Legally Avoid Taxes: 10 Clever Ways To Save More

13 MIN READ

Nobody likes paying more taxes than necessary. Luckily, there are perfectly legal ways to reduce your tax burden without crossing any lines with the IRS. Here's how to legally avoid taxes, from maximizing your retirement accounts to learning how to offset capital gains.

These strategies will help you keep more of your hard-earned money in your pocket while staying on the right side of tax law. While they won't completely eliminate your tax bill, they'll help reduce your taxable income.

What Is the Federal Income Tax?

Federal income tax is money the government collects from your earnings to fund public services and programs, such as national defense, highways, Social Security, Medicare, and more.

The US uses a progressive tax system, meaning the more you earn, the higher percentage you pay. In 2025, federal income tax rates range from 10% to 37%, divided into seven tax brackets based on your income level.

When you earn money (from your job, investments, or other sources), you don't pay taxes on every dollar. First, you subtract the deductions and credits you qualify for. The remaining amount is your taxable income. Then, different portions of that income get taxed at different rates.

For example, if you're a single filer in 2025, you'll pay:

10% on the first $11,925 of taxable income
12% on income between $11,926 and $48,475
22% on income between $48,476 and $103,350
24% on income between $103,351 and $197,300
32% on income between $197,301 and $250,525
35% on income between $250,526 and $626,350
37% on income over $626,350

So, if you're wondering how to avoid taxes legally, the answer is that you need a strategy that will help you reduce your taxable income or qualify for credits that lower your tax bill directly.

How Can I Pay Less Taxes Legally?

There are many legitimate ways to reduce your tax liability without breaking any rules. You can take advantage of several tax breaks that the government created to encourage certain behaviors, like saving for retirement or investing in education.

Some strategies involve shifting when you pay taxes (like with retirement accounts), and others are all about qualifying for deductions or credits that directly reduce your tax bill.

You might also make strategic decisions about how you earn income since different types of income are taxed differently.

In this article, we'll cover:

Maximizing retirement accounts
Using education savings plans (529 plans)
Taking advantage of business deductions
Opening health savings accounts (HSAs)
Making charitable donations
Investing in tax-free municipal bonds
Claiming available tax credits
Deducting self-employment expenses
Adjusting your investment basis for capital gains
Working with tax professionals

Each of these approaches is completely legal and explicitly allowed by the tax code. They're NOT illegal tax evasion tactics.

Tax Avoidance vs Tax Evasion

It's very important to understand the difference between tax avoidance and tax evasion. The first one is perfectly legal and safe, and the second one could land you in serious trouble with the Internal Revenue Service (IRS).

Tax avoidance means legally using tax strategies to minimize what you owe. It can involve taking deductions you qualify for and strategically timing your income and expenses for better tax benefits.
Tax evasion is illegally hiding income or providing false information to the IRS. For example, not reporting cash payments or "under the table" income or claiming deductions for expenses you never incurred.

In other words, contributing $6,000 to your traditional IRA to reduce your taxable income is legal tax avoidance. The government specifically created this incentive to encourage retirement saving.

But if a plumber receives $2,000 cash for a job and doesn't report it on their tax return, that's tax evasion - a federal crime that can result in heavy fines and even prison time.

How To Legally Avoid Taxes: 10 Smart Strategies

1. Maximize Your Retirement Accounts

Contributing to your retirement accounts can result in significant tax savings.

With traditional 401(k)s and IRAs, you contribute pre-tax dollars, meaning the money goes in before income tax is calculated. This immediately reduces your taxable income. For example, if you make $75,000 and contribute $19,500 to your 401(k), you'll only pay income tax on $55,500.

In 2025, you can contribute up to $23,500 to a 401(k) if your employer offers one ($31,000 if you're 50 or older). For IRAs, the limit is $7,000 ($8,000 if you're 50 or older).

If you're self-employed, you can open a SEP IRA or Solo 401(k) with even higher contribution limits.

Roth accounts work differently. You pay taxes on the money now, but then it grows tax-free, and you pay no taxes when you withdraw it in retirement. This makes sense if you expect to be in a higher tax bracket later.

2. Contribute to 529 Plans

If you have children or grandchildren who will attend college, a 529 plan can be a great way to legally avoid paying taxes and save for education expenses.

Contributions to 529 plans aren't deductible on your federal taxes, but many states offer a state tax deduction or credit. For example, New York allows couples to deduct up to $10,000 in contributions annually from state income taxes.

The main tax advantage comes from tax-free growth and withdrawals. Any investment gains in the account aren't taxed as long as you use the money for qualified education expenses. These include tuition, fees, books, supplies, and room and board at eligible institutions.

Related Article | Can You Rollover a 529 Plan?

3. Take Advantage of Business Deductions

Self-employed people and small business owners have access to a few tax deductions that employees don't. These deductions directly reduce your taxable income.

For example, if you work from home, you may be able to claim the home office deduction. You can deduct expenses like rent/mortgage interest, utilities, insurance, and repairs.

You can also deduct ordinary and necessary business expenses like:

Office supplies and equipment
Business travel, meals, and lodging
Professional services (legal, accounting)
Marketing and advertising costs
Business insurance and retirement plan contributions

Your vehicle expenses and health insurance premiums can also be tax deductible.

In other words, a freelancer making $80,000 in gross income might be able to deduct $15,000-$25,000 in legitimate business expenses, potentially dropping them into a lower tax bracket.

4. Open a Health Savings Account (HSA)

A health savings account (HSA) can be a great way to reduce your tax obligations. To qualify, you must have a high-deductible health plan (HDHP).

The tax benefits of an HSA include:

Contributions are tax-deductible (or pre-tax if through an employer)
Growth within the account is tax-free
Withdrawals for qualified medical expenses are tax-free

In 2025, you can contribute up to $4,300 for individual coverage or $8,550 for family coverage, with an additional $1,000 catch-up contribution if you're 55 or older.

With an HSA, you can invest the money and let it grow for years, using it tax-free for healthcare in retirement. If you withdraw funds after age 65 for non-medical expenses, you'll pay income tax but no penalties, similar to a traditional IRA.

5. Make Charitable Donations

Donating to charity helps the causes that you care about, and it can also reduce your tax bill if you itemize deductions on your tax return.

You can deduct money gifts to eligible charities for up to 60% of your adjusted gross income (AGI). For example, if your AGI is $100,000, you could deduct up to $60,000 in cash donations.

Donating appreciated assets like stocks or real estate can be even more tax-efficient. If you donate stocks you've held for more than a year, you can deduct the full market value (up to 30% of your AGI) and avoid capital gains tax you would have paid if you sold the assets first.

6. Invest in Municipal Bonds

Municipal bonds ("munis") allow you to earn interest income without paying federal taxes. These bonds are issued by state and local governments to fund public projects like schools and water systems, and they're exempt from the federal income tax.

If you buy bonds issued by your home state, the interest is typically exempt from state and local taxes, too (making them "triple tax-free").

Municipal bonds are generally considered low-risk investments. They typically offer lower interest rates than corporate bonds, but they make up for it with their tax advantages. If you're in a higher tax bracket, munis will likely provide the same - or better - after-tax return as a taxable bond.

For someone with $100,000 invested in municipal bonds yielding 4%, that's $4,000 in tax-free income annually. In the 32% tax bracket, this saves you $1,280 in federal taxes each year.

7. Claim The Child Tax Credit

The Child Tax Credit provides a direct dollar-for-dollar reduction of your tax bill for each qualifying child under age 17. For 2025, the Child Tax Credit is $2,000 per qualifying child.

You qualify for the full amount of the credit if your modified adjusted gross income doesn't exceed $200,000 (or $400,000 if you're married and filing together).

To qualify, a child must:

Be under 17 at the end of the tax year
Be your son, daughter, stepchild, foster child, brother, sister, or a descendant of any of these
Provide less than half of their own support
Live with you for more than half the year
Be claimed as a dependent on your tax return
Be a US citizen, national, or resident alien
Have a valid Social Security number

If you have three qualifying children, you could reduce your tax bill by $6,000.

Don't confuse this with the Child and Dependent Care Credit, which is a separate credit that helps with childcare expenses while you work.

8. Take Advantage of the Self-Employment Tax Deduction

When you're self-employed, you pay both the employer and employee portions of Social Security and Medicare taxes (self-employment tax).

This totals 15.3% on your first $168,600 of earnings in 2025 (12.4% for Social Security plus 2.9% for Medicare, with an additional 0.9% Medicare tax on earnings above $200,000).

However, the IRS allows you to deduct half of your self-employment tax when calculating your income tax. This deduction reflects the employer portion of these taxes that you're effectively paying yourself.

This is an "above-the-line" deduction, meaning you can take it even if you don't itemize. It directly reduces your adjusted gross income (AGI).

9. Adjust Your Basis for Capital Gains Tax

When you sell investments like stocks, bonds, or real estate, you pay capital gains tax on the difference between the sale price and your cost basis (what you paid plus adjustments).

When you automatically reinvest dividends from stocks or mutual funds, those reinvestments increase your cost basis. Many investors forget to account for these, effectively paying tax twice on the same money.

For real estate, improvements (not repairs) add to your basis. If you buy a home for $300,000 and add a $50,000 addition, your basis becomes $350,000, reducing your taxable gain when you sell.

10. Work With a Tax Professional

Working with a qualified tax professional is one of the best ways to reduce taxes. They can help you figure out how to avoid paying taxes legally, usually through a combination of strategies discussed in this article.

The most value comes from year-round tax planning, not just tax preparation, so look for a professional who can support you continuously.

What Are the Illegal Ways to Reduce Taxes?

It's important to know how to minimize tax liabilities, but it's also essential to understand what crosses the line into illegal territory. The IRS aggressively pursues tax evasion, which can result in hefty penalties and even criminal prosecution.

Common illegal tax practices include:

Not reporting all income: The IRS receives information from employers, banks, investment companies, and payment platforms. Deliberately failing to report income, including cash, cryptocurrency, or foreign earnings, is illegal.
Creating fake deductions: Claiming expenses you never incurred or inflating legitimate expenses is fraud. For example, you can't claim your personal travel as business trips or inflate your charitable donations.
Using fake identities or businesses: Creating shell companies or using others' identities to hide income or create artificial deductions is criminal tax fraud.
Hiding assets offshore: You can have a legal offshore account, but failing to report it or using it to conceal income violates tax law and foreign account reporting requirements.
Improperly claiming dependents: Falsely claiming someone as a dependent who doesn't qualify is illegal tax evasion.

The penalties for tax evasion can be severe. So, only use legitimate and legal strategies to lower taxable income.

FAQs

Is It Possible To Pay No Taxes?

It's very rare for a US resident to legally pay zero federal income tax. You can use combinations of strategies like maxing out retirement contributions, claiming available credits, and shooting for long-term capital gains to reduce how much you pay, but you'll likely still have to pay something to the tax authorities.

Even if you don't have to pay income taxes, most people still pay other taxes like FICA (Social Security and Medicare), property taxes, and sales taxes, so completely avoiding all taxation isn't realistic or legal.

How Can I Reduce My Taxable Income Legally?

Many different strategies can help you legally avoid paying taxes or minimize how much you pay.

Contributing to traditional 401(k)s or IRAs, taking advantage of deductible business expenses (if you run your own business), making charitable contributions, investing in municipal bonds, and opening a health savings account can all have a positive impact on your income tax return. A tax professional can help you figure out the right strategy for you.

Will Buying a Second Home Reduce My Taxes?

Buying a second home can provide tax benefits, but they're typically not big enough to justify the purchase on tax grounds alone.

You can deduct mortgage interest on up to $750,000 of combined mortgage debt for primary and second homes. However, this benefit is often offset by the costs of ownership. Also, vacation home mortgage interest isn't deductible if the property is primarily for personal enjoyment rather than a true second residence.

Are There Tax Loopholes?

What people often call "tax loopholes" are usually completely legal, legitimate, and intentional provisions that are meant to incentivize specific behaviors or benefit certain groups. They aren't accidental or sneaky.

For example, high-net-worth individuals can use strategies like charitable remainder trusts to minimize taxes legally. So, instead of thinking of these tax strategies as loopholes, think of them as tax incentives that anyone who qualifies can use.

Related Article | At What Net Worth Do I Need a Trust?

The Bottom Line

If you want to successfully figure out how to legally avoid taxes, the best step you can take is to work with a knowledgeable tax professional who will help you understand available strategies and planning throughout the year - not just at tax time.

There's no single strategy that eliminates your tax bill. The most effective approach will likely combine multiple strategies to help you keep more of what you earn.