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Reducing your tax liability involves employing various strategies to legally minimize the amount of income subject to taxation. Here are strategies that individuals and businesses often use to optimize their tax positions: Maximize Deductions, Contribute to Retirement Accounts, Employ Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs).

If you claim exempt on your W-4 (Employee's Withholding Certificate) or a similar form, it means you are stating that you meet certain criteria allowing you to be exempt from federal income tax withholding. However, claiming exempt on your W-4 does not mean you are exempt from filing a tax return altogether. You may still need to file a tax return depending on your total income, filing status, and other factors.

A tax credit directly reduces the amount of tax you owe. It is a dollar-for-dollar reduction in your tax liability. A tax deduction reduces the amount of your income that is subject to taxation. You subtract the deductible expense from your total income, and you are taxed on the remaining amount.