Money Girl

How to File Taxes Without Overpaying?

Episode Summary

971. Laura answers a listener's question about filing her first tax return correctly and without overpaying taxes.

Episode Notes

971. Laura answers a listener's question about filing her first tax return correctly and without overpaying taxes.

Find a transcript here.

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Episode Transcription

Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! I love hearing from you and want to answer yours, so if something finance-related is on your mind, leave me a voicemail at 302-364-0308. You can leave your name or remain anonymous.

Today's topic comes from Emily, who says, “I’m a recent graduate in my first job and have to file my first tax return next year for 2025. Can you explain how to follow the tax rules without overpaying?”

Thanks for your question, Emily, and congratulations on landing your first job! I think taxes can feel intimidating, especially when you start your career, so I’m glad you asked this question. While the U.S. tax system is complex, you don’t need to become a tax expert to file an accurate tax return.

This post will review the basics of income taxes and how to comply with the law while minimizing the amount you owe. Your goal should be to pay precisely what you legally owe but not a penny more.

Welcome back to episode 971 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter.

You can learn more, ask any money question, and sign up for the Money Stack at LauraDAdams.com. You can get the newsletter for free or become a paid member with access to my live educational and Q&A events.

How do federal income taxes work?

While you might think that you only pay income taxes on or near April 15 every year, you actually pay them all year long. When you start working, you must complete Form W-4, Employee’s Withholding Certificate, which tells your employer how much tax to withhold from each paycheck. Depending on where you live, you may also need to complete a state tax withholding form.

If you receive a large tax refund, it means you overpaid taxes throughout the previous year and should adjust your withholding by revising your W-4 and any state form.

Letting the government use your money throughout the year is like giving them an interest-free loan. It's better to receive a small tax refund or have a small tax liability to maximize your paychecks. That way, you'll have more to spend or save every month.

If you’re self-employed, you must pay quarterly estimated income taxes to ensure you stay on top of your tax liability throughout the year.

What are the federal income tax brackets?

The U.S. tax system is progressive, meaning that not all your income is taxed at the same rate. A tax bracket is a range of income taxed at a specific rate. Each bracket has a progressively higher rate, so only a portion of your income is taxed at the highest rate.

For 2025, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If you’re in the 24% tax bracket, your entire income is not subject to 24% tax—that’s just the highest rate applied to your top range of income.

For example, let’s say you’re a single taxpayer who made $100,000 in 2025. That amount of income puts you in the 22% tax bracket. But your boss tells you that before the end of 2025, you’ll receive a $5,000 bonus, boosting your gross income to $105,000.

You realize that the cut-off between the 22% bracket and the next-highest 24% bracket is $103,350. Should you worry about getting bumped from the 22% bracket into the 24% bracket? Absolutely not!

You should be thrilled to get a raise because your income won’t be taxed any differently—except for any amount that falls within the top 24% tax bracket. However, after subtracting the standard deduction (which I’ll explain more about in a moment), here’s how your federal income taxes break down by brackets for a taxable income of $89,250 in 2025:

10% on the first $11,925 = $1,192.50.
12% on the next $36,550 (from $11,926 to $48,475) = $4,386.00.
22% on the remaining $40,775 (from $48,476 to $89,250) = $8,970.50.
Total federal tax: $1,192.50 + $4,386.00 + $8,970.50 = $14,549.

Your average tax rate is 13.86% ($14,549 / $105,000), which is much lower than the highest rate applied to your income.

Who must pay federal income taxes?

Not everyone is required to pay income taxes, so let's review the legal requirements. Whether you must file a tax return is based on your gross income, filing status, age, and whether someone else claims you as a dependent.

Gross income is all income you receive that isn't exempt from tax. It typically includes wages, retirement benefits, and investments. It includes all sources of income, including earnings from outside the U.S.

For 2025, you must file a tax return if your gross income is higher than the standard deduction for your filing status when you’re under 65:

Single: $15,750–this is the amount subtracted from the $105,000 income in my previous example that created taxable income of $89,250.
Married (filing separately): $15,750.
Married (filing jointly): $31,500.
Head of Household: $23,625.

I’ll explain more about deductions in a moment. Note that you should always file as Single if you’re unmarried and have no dependents. But if you’re unmarried and support a qualifying child or relative, you’ll save money if you qualify to file as Head of Household.

If you’re over 65 for 2025, the income thresholds to file taxes are slightly higher. Even if your gross income is lower than the thresholds, you still must file a 2025 tax return in certain situations, such as:

Having self-employment net earnings of $400 or more.
Owing any special taxes, such as for distributions from a tax-advantaged account, such as an IRA or HSA.
Receiving advance premium tax credits for health insurance purchased through the Health Insurance Marketplace.

If someone claims you as a dependent on their tax return, such as your parents or another relative, the rules are different. If you're a dependent, you must file a 2025 return if any of the following apply to you:

Your unearned income, such as interest or dividends, is over $1,350.
Your earned income, such as wages from a job, exceeds $15,750.
Your gross income exceeds the larger of $1,350 or your earned income (up to $15,300) plus $450.

It’s important to understand that even if your income is below the filing threshold, you should still file a tax return if you had taxes withheld from your paycheck or if you’re eligible for a refundable tax credit. That’s because you can only get money back from the federal or state government if you file a tax return!

What are legitimate ways to reduce income taxes?

I’m glad that Emily is thinking about ways to avoid overpaying taxes. The best strategy for legitimately reducing them is maximizing potential tax deductions and credits.

A tax deduction is an amount that the Internal Revenue Service (IRS) allows you to subtract from your taxable income. Since a deduction reduces your taxable income, it reduces your tax. For example, if your taxable income is $100,000 and you have $10,000 in tax deductions, your taxable income is reduced to $90,000.

A tax credit is a dollar-for-dollar reduction in the amount of tax you owe, which can be more valuable than a deduction. For example, if you owe $15,000 in federal income tax and have a $5,000 tax credit, your tax liability is reduced to $10,000.

Every year, you can choose between claiming a standard deduction or itemizing deductions. Itemizing is always wise when your total itemized deductions exceed the standard deduction for your tax filing status.

Itemizing allows you to add up specific expenses to reduce your taxable income. Unless Emily has a high amount of deductions, she’ll likely come out ahead by claiming the standard deduction.

However, it’s still a good idea to track potential tax deductions throughout the year so you can compare the total to the standard deduction and choose the method that cuts your taxes the most.

I recommend using a program like Quicken or QuickBooks (if you have business income) to categorize your expenses throughout the year. Then you can run a report at tax time.

What tax deductions and credits should I track?

Here are some of the most common tax deductions for 2025:

State and local taxes, including real estate taxes, up to $40,000.
Home mortgage interest and points paid on up to $750,000 of debt to buy, build, or improve a primary or secondary residence. For mortgages taken out before December 15, 2017, there is a "grandfathered" debt limit of $1 million.
Medical and dental expenses that exceed 7.5% of adjusted gross income.
Charitable cash donations can be up to 60% of adjusted gross income.

But what if you don’t have enough deductions to make itemizing pay off? Don’t worry, there are some deductions you can take even if you claim the standard deduction. For 2025, they include:

Student loan interest up to $2,500 (if you meet certain income limits).
Traditional IRA contributions up to a maximum of $7,000 (or $8,000 if you’re age 50 or older).
Health savings account (HSA) contributions up to $4,300 when you have a qualifying health plan as an individual or $8,550 with a family plan.
Self-employment expenses, such as one-half the self-employment tax, contributions to a qualified retirement plan, and health insurance payments.

Here are some of the most valuable tax credits for 2025:

Retirement Savings Contribution Credit is a non-refundable tax credit designed to help qualifying low- to moderate-income taxpayers offset the cost of saving for retirement. The credit amount depends on how much you contribute to a qualified retirement account, such as an IRA or 401(k), and your tax filing status.
American Opportunity Tax Credit (AOTC) gives you a credit up to $2,500 per year per student for qualified education expenses for the first four years of undergraduate higher education. The credit amount is based on your income and tax filing status.
Lifetime Learning Credit (LLC) gives you a credit up to $2,000 per year for any educational expenses for an unlimited number of years. The credit amount is based on your income and tax filing status. You cannot claim both the AOTC and the LLC for the same student in the same year. You can choose the credit that saves you the most.

How to file income taxes?

Every January or February, you should receive various financial forms that help you file your income taxes, including:

Form W-2 is a summary of earnings from your employer, including how much tax you’ve already paid.
Form 1098-E (Student Loan Interest) shows how much interest you paid on any student loans.
Form 1099-INT shows any interest earned on financial accounts, such as your checking and savings accounts.
Form 1099-MISC reports miscellaneous income, such as freelance work.

Once you have all your tax-related forms and information for various deductions and credits, you’re ready to file your federal and any state income tax returns. If your income is below a certain threshold, you can file for free using the IRS portal.

You can also use tax software, such as TurboTax, or hire a tax professional to complete your return. The information covered in this post only scratches the surface of the U.S. tax code.

Emily, I hope this information takes some of the mystery out of filing your first tax return. If you have questions, don’t hesitate to get help from a tax pro, such as a Certified Public Accountant (CPA). Their fee may be worthwhile to ensure you claim every possible tax deduction and credit to reduce your federal and any applicable state taxes.

That's all for now. I'll talk to you soon. Until then, here's to living a richer life!

Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, Rebekah Sebastian is our marketing and publicity manager, and Nathaniel Hoopes is our marketing contractor.