W-2 Employee looking to get ahead financially?

As a W-2 employee, your options for lowering taxes and getting ahead financially are somewhat limited compared to a business owner, since you don’t have direct control over business deductions or income timing. However, there are still plenty of practical strategies you can use to reduce your tax bill and build wealth. Here’s what I’d do if I were in your shoes:

Lowering Taxes as a W-2 Employee

1. Maximize Pre-Tax Contributions to Retirement Plans

• 401(k) or 403(b): Contribute the maximum to your employer-sponsored plan—$23,000 in 2025 (plus $7,500 catch-up if over 50). This reduces your taxable income dollar-for-dollar. If your employer matches, that’s free money—take it.

• Traditional IRA: If you don’t have a workplace plan or your income qualifies, contribute up to $7,000 ($8,000 if over 50) in 2025. Deductibility phases out at higher incomes (e.g., $80,000–$90,000 for single filers or $129,000–$149,000 for joint filers in 2025, adjusted annually).

2. Use a Health Savings Account (HSA)

• If you have a high-deductible health plan (HDHP), contribute to an HSA—$4,150 for individuals or $8,300 for families in 2025 (plus $1,000 catch-up if over 55). Contributions are pre-tax, withdrawals for medical expenses are tax-free, and unused funds roll over. After age 65, you can use it penalty-free for anything (though taxed if not medical).

3. Adjust Your W-4 Withholding

• Review your W-4 with your employer. If you’re getting a big refund every year, you’re overpaying taxes upfront—freeing up that cash monthly could help you invest or pay down debt sooner. Use the IRS Withholding Estimator to optimize it.

4. Claim All Available Tax Credits

• Earned Income Tax Credit (EITC): If your income is low to moderate (e.g., under $63,698 for joint filers with kids in 2024, adjusted for 2025), this refundable credit can put cash back in your pocket.

• Child Tax Credit: Up to $2,000 per qualifying child under 17 (partially refundable up to $1,700 in 2025), plus $500 for other dependents.

• Saver’s Credit: If your income is below $76,500 (joint) or $38,250 (single) in 2025, you can get a credit up to $1,000 ($2,000 joint) for contributing to retirement accounts.

5. Deduct Work-Related Expenses (If Eligible)

• Most W-2 employees can’t deduct unreimbursed job expenses (thanks to the 2017 Tax Cuts and Jobs Act), but if your employer doesn’t reimburse you for things like tools, uniforms, or mileage (and it’s required for your job), check if your state allows these deductions on your state return.

6. Leverage Education Benefits

• If you’re upskilling, the Lifetime Learning Credit offers up to $2,000 for qualified tuition and fees (income limits apply: $90,000 single, $180,000 joint in 2025).

• Employer-provided education assistance (up to $5,250 annually) is tax-free if they offer it.

7. Consider Itemizing Deductions

• If your total itemized deductions (e.g., mortgage interest, property taxes, charitable donations, medical expenses over 7.5% of AGI) exceed the standard deduction ($15,000 single, $30,000 joint in 2025, estimated), itemize to lower taxable income.

Getting Ahead Financially

1. Build an Emergency Fund

• Aim for 3–6 months of expenses in a high-yield savings account (some offer 4–5% interest in 2025). This prevents debt when surprises hit and frees up cash flow for investing.

2. Pay Down High-Interest Debt

• Attack credit card or personal loan balances with interest rates above 7–8%. Paying these off is like earning a guaranteed return equal to the interest rate, tax-free.

3. Invest for the Long Term

• Roth IRA: Fund it with after-tax dollars (same $7,000/$8,000 limits as Traditional IRA). Earnings grow tax-free, and withdrawals in retirement are tax-free. No income cap if you use a “backdoor” Roth (convert Traditional IRA contributions).

• Brokerage Account: After maxing tax-advantaged accounts, invest in low-cost index funds or ETFs (e.g., S&P 500). No tax breaks now, but long-term capital gains rates (0%, 15%, or 20%) are lower than income tax rates.

• Automate It: Set up automatic transfers to investment accounts so you’re consistently building wealth.

4. Increase Your Income

• Side Hustle: Start a small gig (e.g., freelancing, handyman work if you’re in construction) to generate extra cash. Even $500/month invested at 7% grows to over $41,000 in 20 years.

• Ask for a Raise: If you’ve been at your job a while, negotiate a higher salary—every extra dollar helps.

• Upskill: Take a course or certification to qualify for higher-paying roles.

5. Live Below Your Means

• Cut unnecessary expenses (e.g., subscriptions, dining out) and redirect that money to savings or investments. A 1% increase in savings rate compounds massively over time.

6. Plan for Tax Efficiency in the Future

• If you expect your income to rise, lean into Roth options now (taxed at today’s lower rate). If you think you’ll earn less in retirement, prioritize pre-tax accounts like a 401(k).

Example Action Plan (Assuming $60,000 Salary, Single)

• Max HSA: Contribute $4,150 → lowers taxable income to $55,850.

• Max 401(k): Contribute $23,000 →

 taxable income drops to $32,850.

• Emergency Fund: Save $500/month in a 5% savings account → $6,000 in a year.

• Roth IRA: Fund $7,000 → grows tax-free for retirement.

• Tax Credits: Claim Saver’s Credit if eligible → up to $1,000 back.

• Result: Tax bill shrinks, investments grow, and you’ve got a safety net.

Often Missed Strategies

• Donor Advised Funds and other 501(c) organizations

• Business startup costs

CXO has a team of people from various backgrounds from legal, accounting, taxes, and audit to help you set up, manage, and defend you against any audits so you legally pay the lowest taxes legally possible and start getting you ahead financially.