How to Reduce Tax Deduction from Salary

Seeing a significant portion of your hard-earned salary vanish for taxes on every payslip can be disheartening. While paying taxes is a legal and civic duty, you have complete control over ensuring you aren't paying more than you need to throughout the year. This guide will walk you through the practical, legitimate steps you can take to reduce the tax deducted from your salary and increase your take-home pay.

First, Understand How Tax Withholding Works

Before making any changes, it's important to understand why money is taken from your paycheck in the first place. The U.S. tax system is "pay-as-you-go," which means you pay your estimated income tax throughout the year, not just in one lump sum on Tax Day. Your employer accomplishes this for you through payroll withholding. The amount withheld is an estimate based on information you provide on your Form W-4, Employee's Withholding Certificate.

The goal is to get this estimate as accurate as possible.

• Withhold too little: You'll owe the IRS a large sum of money when you file your taxes and might even face underpayment penalties.
• Withhold too much: You'll get a tax refund, which might feel like a bonus, but it's really just an interest-free loan you gave to the government with your own money.

By optimizing your withholding, you can strike the right balance, keeping more money in your pocket throughout the year without incurring a hefty tax bill later.

The Most Direct Method: Adjusting Your Form W-4

The Form W-4 is the single most powerful tool you have for controlling your payroll tax deductions. You can submit a new W-4 to your employer's HR or payroll department at any time, not just when you start a new job. It's wise to review it annually or whenever you have a major life event, such as getting married, having a child, or a significant change in income for you or your spouse.

Here’s a breakdown of how to fill out the form to accurately reflect your tax situation, which often leads to less tax being withheld.

Step 1: Enter Personal Information

This part is straightforward: your name, address, filing status (Single, Married Filing Separately, Married Filing Jointly, or Head of Household). Choosing the correct filing status is the foundation for an accurate calculation.

Step 2: Multiple Jobs or Spouse Works

This is a common source of confusion and withholding errors. If this section applies to you (e.g., you have a side job or your spouse also works), you have a few options to ensure enough tax is withheld to cover the combined income. The most accurate method is using the IRS's Tax Withholding Estimator. This online tool gives you a precise recommendation for what to put on your Form W-4. Alternatively, you can use the worksheet provided with the form or, if there are only two jobs with similar pay, check the box in section 2(c). Getting this right prevents a surprise tax bill caused by under-withholding.

Step 3: Claim Dependents

This is where you directly reduce your tax. If you have dependent children who qualify for the Child Tax Credit or other dependents who qualify for the credit for other dependents, you tally the total credit amount here. For 2024, the Child Tax Credit is $2,000 per qualifying child. If you have two qualifying children, you would enter $4,000 in this section. This tells your payroll system that your final tax bill will be $4,000 lower, so it will reduce the tax taken from each paycheck accordingly.

Step 4: Other Adjustments

This section allows for a more personalized adjustment to your withholding.

• Line 4(a) - Other Income: If you have significant income that isn't subject to withholding (like dividends, interest, or freelance income), you can note it here. This will increase your withholding to help you cover the tax bill on that external income.
• Line 4(b) - Deductions: This is a key line for reducing your withholding. If you expect to claim deductions larger than the standard deduction (for example, from high mortgage interest, state and local taxes, and substantial charitable gifts), you can enter that extra amount here. Use the Deductions Worksheet on page 3 of Form W-4. By declaring your expected deductions, you tell your employer that your taxable income will be lower, and they will withhold less tax.
• Line 4(c) - Extra Withholding: This is for entering an extra dollar amount you want withheld from each paycheck. You would use this if the online estimator suggests it, or if you prefer a larger refund. For our goal of reducing deductions, you'll likely leave this blank.

Reduce Your Taxable Income with Pre-Tax Contributions

Beyond the W-4, the most effective strategy for paying less tax is to reduce your taxable income. You can do this by contributing to tax-advantaged retirement and health savings accounts directly from your paycheck. The money goes in before payroll taxes are calculated, which means your total taxable income shrinks, resulting in a smaller tax deduction.

Contribute to a 401(k) or 403(b)

Contributing to your employer-sponsored retirement plan is one of the best ways to lower your taxable income today while saving for the future. For 2024, you can contribute up to $23,000 (or $30,500 if you're age 50 or over). If your employer offers a matching contribution, make sure you contribute at least enough to get the full match—it's essentially free money. The more you contribute, the lower your reportable income is, and the less tax is withheld.

Use a Health Savings Account (HSA)

If you have a high-deductible health plan (HDHP), you may be eligible to contribute to an HSA. This account is a powerhouse for tax savings. Contributions are made pre-tax, lowering your taxable income. The money then grows tax-free, and you can withdraw it tax-free to pay for qualified medical expenses at any time. For 2024, the contribution limits are $4,150 for self-only coverage and $8,300 for family coverage.

Take Advantage of a Flexible Spending Account (FSA)

An FSA is another employer-offered account that lets you set aside pre-tax dollars for specific expenses. There are two main types:

• Health FSA: For out-of-pocket medical costs like copays, deductibles, and prescriptions.
• Dependent Care FSA: For costs associated with caring for children or other qualified dependents, like daycare expenses.

Just be sure to estimate your expenses accurately, as FSA funds are often "use-it-or-lose-it" by the end of the year.

Enroll in Commuter Benefits

Many employers offer programs that allow you to pay for work-related parking or public transportation costs with pre-tax money. This is another simple way to reduce your taxable income and save money on expenses you’re already incurring.

Explore Tax Deductions and Credits You Can Plan For

While the strategies above reduce the tax withheld from each paycheck, actively planning for tax deductions and credits reduces your overall tax liability at the end of the year. When you know you'll be taking these deductions, you can confidently adjust your W-4 using the worksheet on an ongoing basis.

• Student Loan Interest Deduction: You can deduct the interest you paid on student loans, up to a maximum of $2,500 per year.
• Charitable Contributions: If you itemize, you can deduct contributions made to qualified charities. Keep good records, especially for non-cash donations.
• Traditional IRA Contributions: If you're eligible, contributions to a Traditional IRA can be deductible, lowering your adjusted gross income.

A Quick Note on Side Income

If you earn extra income from freelancing or a side business where taxes are not automatically withheld, your total tax liability will be higher. To avoid an underpayment penalty, you have two options: pay quarterly estimated taxes directly to the IRS, or update your W-4 at your primary job to withhold more. Using the IRS Tax Withholding Estimator is the best way to determine how much extra to withhold to cover all your income sources accurately.

Final Thoughts

Effectively reducing the tax you have deducted from your salary comes down to being proactive. It starts with an accurate Form W-4 and is supported by smart use of pre-tax accounts like 401(k)s and HSAs, ensuring you keep more of your money with every paycheck rather than waiting for a refund.

For CPAs and other tax professionals, providing proactive advice on withholding and tax-advantaged savings is key to becoming a trusted advisor. But giving guidance on contribution limits, deduction phase-outs, and form adjustments requires absolute confidence. To translate complex tax questions into clear, actionable client advice without hours of manual research, Feather AI provides instant, citation-backed answers. We help you deliver precise guidance so your clients can make better financial decisions.