Behavioral economist Alex Smith believes we spend too much time worrying about this year’s taxes and too little planning for next year.
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Alexander Smith wants you to view your tax return as an opportunity, not a chore.
If you do the math and track your money, you’ll know how to get the taxes you owe from the income you earn. Armed with that information, you can change your behavior and reduce your taxes next year.
Smith is a behavioral economist at Worcester Polytechnic Institute in Massachusetts. He hopes taxpayers will become more excited about the prospect of lowering their taxes in the future simply by changing how they spend their money now.
“What they don’t realize is that they could potentially save a lot of money by learning how the tax system works,” he says. “It’s important to see this process as a learning opportunity.”
Smith believes taxpayers spend too much time looking for tax breaks and loopholes on income earned last year and too little time thinking about how to change their behavior now to reduce their tax bill later.
“Given the decisions we made last year, there’s not much we can do,” he said.
Would you like to have more fun saving tax?
Smith said people don’t get excited about saving money on taxes, they don’t get excited at the thought of getting a $2,000 tax refund check or finding a $20 bill on the sidewalk.
“If I dropped a bunch of hundred dollar bills on the street, people would run after them,” he said. “But if you say you can make some decisions about tax cuts that will save you the same amount of money, you don’t get the same elementary response.”
People treat money differently depending on where it comes from. Behavioral economists call this “mental accounting.” Smith holds up a $100 bill during class to prove his point. Students are gasping at the sight of such a large sect.
Smith believes taxpayers should spend more time talking with their tax professionals about next year’s taxes. Tax accountants agree.
“We try to get our clients to contact us early in the year, talking about next year,” said Scott Dobbs, a certified public accountant in Rockford, Illinois.
“Being a good client of your accountant means asking great questions,” says Larry Johnson, senior tax manager at Sikich in Springfield, Illinois. “This question can lead to an answer that leads to another question that suddenly reveals significant tax savings.”
Understand tax classifications
Smith said the main reason to study tax returns is to learn more about your marginal tax rate.
Our progressive “tax bracket” system means that you are taxed at progressively higher rates depending on your income level. The lowest income bracket pays the lowest tax rate, and the next highest income bracket pays a higher rate. The higher your taxable income, the higher your tax rate, but the top tax rate applies only to the highest income brackets.
Let’s say you earn $75,000 in taxable income in 2025 and are single. On the first $11,925 of that income, you’ll pay the lowest federal tax rate of 10% in 2025. For income brackets from $11,926 to $48,475, you’ll pay a 12% tax rate. On all income above $48,475, you’ll pay taxes at a much higher rate of 22%.
Smith has some favorite strategies for lowering your taxes. To fully understand them, you need to understand the tax classifications.
Here are four strategies to lower your taxes.
retirement contributions
Contributing funds to a tax-advantaged retirement account, such as a 401(k) or IRA, reduces your taxable income. Smith believes people don’t realize how much they’re saving.
For the 2025 tax year, you can contribute up to $23,500 to your 401(k). Older Americans have higher limits.
Let’s say the top federal tax rate is 22%, and you pay an additional 3% of your income in state and local taxes. Contributing $1,000 to your 401(k) can provide tax benefits on top of your income. That’s a $250 savings on $1,000, Smith said.
Many of us would cringe at the thought of losing $1,000 of income that we could spend now. Smith challenges us to focus more on the value we create for the future.
“Everything becomes a lot more enjoyable if you can think long-term,” he said.
Contributing to HSA
The same argument applies to health savings accounts.
Like a traditional 401(k), an HSA is funded with pre-tax dollars. In the example above, depositing $1,000 into your Health Savings Account would save you $250 in taxes. And if you follow the rules, you won’t have to pay taxes on the money you spend.
For the 2025 tax year, families will be able to contribute up to $8,550 to a health savings account.
Just like money in a 401(k), you can save and invest your HSA dollars for years and watch their value grow. You can use it whenever you want.
“The future profits are worth it,” Smith said.
charitable donation
Smith believes taxpayers need to better understand the tax implications of charities.
The IRS generally allows taxpayers to deduct up to half of their adjusted gross income as contributions to charity.
You can donate money, household goods, cars, and anything else. Tax experts urge donors to read the rules, collect receipts, take photos and carefully determine the fair market value of donated items. The Salvation Army offers a handy donation value guide.
To capture the full amount of your charitable giving on your 2025 tax return, you’ll need to itemize your deductions. Otherwise, you claim the standard deduction, which is $15,750 for a single filer in 2025.
Itemization is helpful if your deductions exceed the threshold. You can generally deduct donations, state and local taxes, mortgage interest, and some medical and dental expenses.
Recovery of loss
This strategy is a staple of tax season for the wealthy. You sell an investment at a loss, exchange it for a similar one, and use the loss to offset gains on sales of other investments on your tax return.
