You've worked hard all year. The last thing you want is to lose thousands to easily avoidable tax mistakes when filing your 2025 return this April.
Whether you're a high earner navigating equity compensation or just starting your career, W-2 employees are often told there’s not much they can do to lower their tax bill. The good news? This isn’t the whole story, and there are strategic steps you can take to manage your tax obligations, especially in the long term.
If you want to skip to the part where you optimize your taxes, we're happy to do it for you: Domain Money can seamlessly pair tax optimization and tax filing in one flat-fee membership.
Let's break down the most common tax mistakes W-2 earners make and the smart moves that can help you keep more of what you've earned.
Understanding Your W-2 Tax Situation
As a W-2 employee, your employer withholds taxes from each paycheck and reports your earnings to the IRS. But your actual tax liability depends on far more than your salary. Bonuses, equity compensation, investment income, and deductions all play a role in determining what you owe or what you're owed back.
The problem? Many professionals discover they've been overpaying (or worse, underpaying) only after the tax year ends. By then, opportunities to optimize have passed.
Tax Trap #1: Ignoring the New OBBBA Tax Breaks
The One Big Beautiful Bill Act (OBBBA) introduced several game-changing deductions for 2025 that many W-2 employees are leaving on the table.
The No Tax on Tips Deduction allows eligible workers to deduct up to $25,000 in tips from their taxable income. If you work in a role where tipping is customary, whether you're in hospitality, food service, or another tipping industry, this could mean impactful money back in your pocket. Your employer must designate these tips on your W-2 for you to qualify.
The No Tax on Overtime Deduction lets you deduct qualified overtime pay up to $12,500 (single filers) or $25,000 (married filing jointly). However, both deductions phase out at higher incomes, starting at $150,000 for single filers and $300,000 for joint filers.
The Enhanced Senior Deduction offers an additional $6,000 deduction for taxpayers 65 and older (on top of your standard deduction), though it also phases out above certain income thresholds.
These deductions expire after 2028, so don't wait to take advantage.
Tax Trap #2: Leaving Pre-Tax Retirement Contributions on the Table
One of the biggest missed opportunities is not maxing out your 401(k) or 403(b) contributions.
For the 2025 tax year, contribution limits were:
- $23,500 for employer-sponsored retirement plans
- $31,000 catch-up contributions for people 50 or older
- $34,750 for people 60-63
For 2026, these limits have increased to:
- $24,500 for employer-sponsored retirement plans
- $32,500 catch-up contributions for people 50 or older
- $34,750 for people 60-63
Every dollar you contribute on a pre-tax basis reduces your taxable income dollar-for-dollar. That means if you're in the 24% tax bracket, a $23,500 contribution could save you $5,640 in federal taxes alone.
Even if you can't max out completely, aim to contribute at least enough to capture your full employer match. Leaving that match on the table is like turning down part of your salary.
Tax Trap #3: Forgetting About Traditional IRA Deductions
If you didn’t max out your 401(k) for 2025, the deadline has passed. But, you can fund a Traditional IRA for tax year 2025 until April 15th of this year.
You can contribute to a Traditional IRA even if you have an employer plan. For tax year 2025, the limit is $7,000 ($8,000 if you're 50 or older). The catch? Whether you can deduct those contributions depends on your income and whether you're covered by an employer plan.
If you're covered by a workplace retirement plan and your modified adjusted gross income exceeds $79,000 (single) or $126,000 (married filing jointly with a retirement plan at work), your IRA deduction is reduced. But if you're not covered or your spouse isn't, different, more generous rules apply.
This gives you extra time to lower last year's tax bill, but it is a strategy that comes with some restrictions, so it may be worth consulting with a tax or CFP® professional.
Tax Trap #4: Missing HSA Triple Tax Advantages
If you have a high-deductible health plan, a Health Savings Account (HSA) might be the most powerful tax tool you're not using.
HSAs offer a rare triple tax benefit:
- Contributions are tax-deductible
- Growth is tax-free
- Withdrawals for qualified medical expenses are tax-free
For 2025, you can contribute up to $4,300 as an individual or $8,550 for family coverage. If you're 55 or older, add another $1,000.
For 2026, those limits have increased to $4,400 for individual and $8,750 for family coverage, with the catch-up contribution remaining $1,000.
Like an IRA, an HSA can be funded for the previous tax year through April 15th of the following year, giving more opportunity to max out your contributions.
Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year after year. Many people use their HSA as a stealth retirement account, paying medical expenses out-of-pocket now and letting their HSA grow tax-free for decades, intending to use it for medical costs later in life.
Tax Trap #5: Not Taking Advantage of Dependent Care FSAs
Childcare is a huge cost. If you're paying for it, you should be reducing your taxes for it.
A Dependent Care FSA lets you contribute up to $5,000 in pre-tax dollars (for 2025) to cover childcare costs for children under 13. That's $5,000 that isn't touched by federal income tax, Social Security tax, or Medicare tax, but the plan does have to be offered by an employer.
The catch is, it's use-it-or-lose-it, much like a medical FSA. Any money left at year-end disappears. Plan carefully based on your anticipated childcare expenses.
Important note: You can't double-dip. If you use a Dependent Care FSA, it reduces the amount you can claim for the Child and Dependent Care Credit. Run the numbers both ways to see which approach saves you more, or have a pro do it for you.
Tax Trap #6: Equity Compensation Tax Surprises
If you receive stock options, RSUs, or other equity compensation, you're facing one of the most complex and expensive tax traps for W-2 employees.
RSUs are taxed as ordinary income when they vest. That income hits your W-2 and can push you into a higher tax bracket. Worse, the typical 22% federal withholding often isn't enough. High earners can face effective tax rates above 40% when you factor in federal, state, Social Security, and Medicare taxes.
Many professionals don't realize they can face a massive tax bill on equity that's still restricted due to company trading windows or hasn't been sold yet. Planning ahead, whether through setting aside cash for taxes, doing tax-loss harvesting elsewhere, or coordinating RSU vesting with other income, makes all the difference.
Stock options (ISOs and NSOs) create their own challenges. Non-qualified stock options are taxed as ordinary income when exercised. Incentive stock options seem better, with potential long-term capital gains treatment, until you trigger the Alternative Minimum Tax (AMT).
Domain Money's Financial Advisors work with tech professionals and high earners navigating these exact scenarios. We help you model different exercise strategies, plan for tax impacts, and integrate equity into your overall financial strategy.
Tax Trap #7: Overlooking the Expanded SALT Deduction
For years, the $10,000 cap on the State and Local Tax (SALT) deduction left high earners in high-tax states paying federal taxes on money they'd already sent to state and local governments.
The OBBBA changed that, temporarily. For 2025 through 2029, the SALT deduction cap increases to $40,000 for taxpayers with modified adjusted gross income under $500,000 ($250,000 if married filing separately).
Understanding the SALT phaseout: If your MAGI is above the threshold, your deduction starts to decrease. The phaseout begins when your MAGI reaches $500,000 in 2025 (or $250,000 for those married filing separately), reducing the deduction by 30% of your excess MAGI.
Here's how it works:
- Example: A married couple's MAGI is $540,000 in 2025. Since they are $40,000 over the MAGI limit, their SALT cap is reduced by $12,000 ($40,000 x 30%), resulting in a maximum SALT deduction of $28,000 ($40,000 minus $12,000).
- The cap cannot go below $10,000, no matter how high your income. So, taxpayers who fully phase out will still be able to deduct up to $10,000, just like before.
- Just like the SALT cap, the MAGI phaseout threshold increases by 1% annually through tax year 2029. This means phaseout will begin at $505,000 MAGI in 2026, $510,050 MAGI in 2027, and so on.
Here's the thing: whether you should itemize depends on comparing your total itemized deductions against the standard deduction ($15,750 for single filers, $31,500 for married filing jointly in 2025). With the higher SALT cap, more people will find itemizing worthwhile, but you need to run the math.
Tax Trap #8: Charitable Donations Without a Strategy
Love giving to charity? You can be generous and strategic at the same time.
Starting in 2026, even taxpayers who claim the standard deduction can deduct up to $1,000 ($2,000 for joint filers) in charitable contributions, as long as those donations were made in cash, rather than donating clothes, services or other forms of donations. That's a new benefit from the OBBBA.
But for 2025 taxes, you must itemize to deduct charitable donations. If you're close to the itemization threshold, consider "bunching" donations, giving two or three years' worth of contributions in one year to itemize, then taking the standard deduction in other years.
Another strategy for high earners: donor-advised funds. You get an immediate tax deduction for the full amount contributed, but you can spread the actual donations to charities over multiple years.
Don't forget: You need receipts for all donations, and special rules apply for non-cash gifts over certain amounts.
Tax Trap #9: The New Car Loan Interest Deduction You Might Miss
Here's a brand-new opportunity from the OBBBA: the car loan interest deduction.
For 2025 through 2028, if you purchased a new, U.S.-assembled vehicle in 2025, you can deduct up to $10,000 in loan interest paid on that purchase.
The vehicle must have been manufactured in the U.S. (you'll need the VIN on your tax return). And like many OBBBA benefits, this deduction phases out above certain income levels, starting at $100,000 for single filers and $200,000 for joint filers.
Bought a qualifying vehicle in 2025? Don't leave this deduction on the table.
Tax Trap #10: Withholding That Doesn't Match Your Actual Tax Situation
Here's the mistake that catches even financially savvy professionals: assuming your paycheck withholding is correct.
Your W-4 form tells your employer how much tax to withhold. But it's based on estimates. If you got married, had a child, bought a home, or had a major income change, your withholding might be way off.
Too much withheld? You're giving the IRS an interest-free loan all year. Too little? You'll owe a big bill in April, possibly with penalties.
Many people enjoy the feeling of a big tax refund, but that money is coming directly from your paychecks, year-round.
The IRS withholding estimator can help, but this is where professional guidance really pays off. A CFP® professional can model your full tax situation (salary, bonuses, equity compensation, investment income, deductions) and tell you exactly what you should be withholding.
Tax Trap #11: Not Understanding Itemizing vs. Standard Deduction
Should you itemize or take the standard deduction? It's one of the most important questions at tax time, yet many people just accept whatever their tax software suggests without understanding why.
The standard deduction for 2025 is $15,750 (single) or $31,500 (married filing jointly). If your itemized deductions (mortgage interest, state and local taxes, charitable donations, medical expenses above 7.5% of AGI) don't exceed those amounts, you're better off with the standard deduction.
But here's what's changed: with the expanded SALT deduction cap at $40,000, more high earners, especially those living in high-tax states, will benefit from itemizing. Run the numbers both ways.
And remember: some deductions are "above the line," meaning you get them regardless of whether you itemize. These include retirement contributions, HSA contributions, student loan interest (if you qualify), and several of the new OBBBA deductions.
Tax Trap #12: Waiting Until April to Think About Taxes
The biggest tax mistake? Treating taxes as an April event instead of a year-round strategy.
Most opportunities to reduce your 2025 tax bill closed on December 31, 2025. The time to maximize retirement contributions, harvest investment losses, and bunch charitable donations has passed.
The exceptions (IRA contributions and HSA contributions) give you until April 15, 2026, to reduce your 2025 taxes. Take advantage while you can.
More importantly, start thinking about 2026 now. If you got a big refund, adjust your withholding so you're not overpaying throughout the year. If you owed money, increase withholding to avoid penalties next year.
Tax Planning vs. Tax Preparation: Understanding the Difference
Tax preparation is filing your return. Tax planning is making strategic decisions throughout the year to minimize what you'll owe.
Most people only do tax preparation. They gather documents in March, plug numbers into software or hand everything to an accountant, and file by the deadline. They're playing defense.
Tax planning is offense. It's understanding how your income, deductions, and credits interact. It's making smart moves with your retirement accounts, charitable giving, and investment strategy to reduce your lifetime tax burden.
Research shows that Vanguard's comprehensive analysis found professional financial guidance adds approximately 3% in net returns annually through optimized decisions, strategic tax planning, and behavioral coaching. For a $500,000 portfolio, that could mean $1.3 million more over 30 years.
When to Get Professional Help
Not everyone needs a financial advisor for taxes. If your situation is straightforward (W-2 income, standard deduction, no equity compensation), quality tax software probably works fine.
But consider professional help if you:
- Have equity compensation (RSUs, stock options, ESPP)
- Earning in or above the 24% federal tax bracket who wants to maximize deductions
- Own rental property or have complex investment income
- Are navigating major life changes (marriage, divorce, home purchase)
- Want integrated financial planning, not just tax filing
- Have been surprised by large tax bills or refunds in the past
Domain Money's CFP® professionals specialize in working with high-earning professionals and tech employees navigating these exact challenges. Unlike traditional advisors who charge 1% of assets under management, we offer transparent flat-fee memberships starting at $3,200.
Our Strategic and Comprehensive plans include integrated tax planning and tax filing, meaning your taxes aren't handled in isolation but as part of your complete financial strategy. We help you optimize equity compensation, coordinate retirement contributions, and implement tax-efficient investment strategies.
Your Next Smart Move
You've worked too hard this year to leave money on the table at tax time.
Whether you're filing your 2025 return in the coming weeks or planning for 2026, the strategies above can help you avoid costly mistakes and keep more of what you've earned.
Start by reviewing your 2024 tax return. What deductions did you take? What opportunities did you miss? How did your actual tax compare to what was withheld from your paychecks?
Then think about 2026. If you haven't maxed out retirement contributions, set up automatic increases. Review whether you should open an HSA. Check if your withholding matches your actual tax situation. Small adjustments now compound into significant savings over time.
Most importantly, stop treating taxes as something you deal with once a year in a panic. Your financial strategy and your tax strategy should work together, not in isolation.
Ready to turn your tax situation from overwhelming to optimized? Talk to a Domain Money CFP® professional who can look at your complete financial picture, not just help you file, but help you plan. We'll break down your equity compensation, model different scenarios, and create a clear action plan that puts thousands back in your pocket.
Let's make your money work as hard as you do, starting with keeping more of what you earn. Book your free strategy session today.
This information is for educational purposes only and should not be considered personalized financial advice. Every financial situation is unique, and strategies should be tailored to individual circumstances, goals, and risk tolerance. Please consult with a qualified CFP® professional before making significant financial decisions. Domain Money provides comprehensive financial planning services to help clients achieve their goals through transparent, fee-only advice.
