As the end of the year approaches, proactive tax planning can help individuals reduce their tax liability, avoid penalties, and improve long-term financial outcomes. Reviewing these year-end tax planning strategies before December 31 can create meaningful savings and ensure you are positioned for the year ahead.
1. Income and Deduction Timing Strategies
Timing income and deductions is a core year-end tax planning strategy. Accelerating or deferring income and deductions may help optimize your tax outcome depending on expected changes in marginal tax rates, exposure to the Alternative Minimum Tax (AMT), expiring carryovers, or pending tax law changes. Strategic timing should also account for future income levels and the time value of money.
2. Capital Gains and Tax-Loss Harvesting
Tax-loss harvesting allows individuals to realize capital losses to offset capital gains and up to $3,000 of ordinary income each year. In lower-income years, it may also be advantageous to realize capital gains at reduced tax rates. Be mindful of wash sale rules and prioritize offsetting gains taxed at higher rates. Large capital gains may also increase exposure to the AMT, making careful planning essential.
3. Charitable Giving and Tax Deductions
Charitable contributions must be made by year-end to qualify for a deduction. Planning should consider adjusted gross income (AGI) limits and whether donating appreciated securities instead of cash can provide additional tax benefits by avoiding capital gains tax while still receiving a charitable deduction.
4. Maximize Retirement Account Contributions
Contribute the maximum allowable amounts to IRA’s, 401 (k)s, and other retirement plans, including catch-up contributions. Maximizing retirement contributions can lower current taxable income while strengthening long-term retirement savings.
2025 Retirement Contribution Limits:
- IRAs: $7,000, plus a $1,000 catch-up contribution ages 50+ ($8,000 total)
- 401(k)s: $23,500, plus a $7,500 catch-up for ages 50+, and $11,250 for ages 60–63
- SEP IRAs: $70,000 or 25% of compensation (no catch-up contributions)
- SIMPLE IRAs: $16,500, plus a $3,500 catch-up for age 50+, and $5,250 for ages 60–63
5. Required Minimum Distribution (RMD) Planning
Failing to take required minimum distributions from retirement accounts can result in significant penalties. Year-end planning should confirm RMDs are taken on time and evaluate whether qualified charitable distributions (QCDs) can satisfy RMD requirements in a tax-efficient manner.
6. Gift and Estate Tax Planning Strategies
Using the annual gift tax exclusion and lifetime estate tax exemption can help transfer wealth efficiently while reducing future estate tax exposure. Gifting appreciated assets to family members in lower tax brackets (when not subject to the kiddie tax) or donating appreciated securities to charity may further enhance tax savings.
7. SALT Deduction Planning
State and local tax (SALT) deductions remain subject to federal caps. Year-end planning should evaluate the timing and amount of SALT payments and consider deduction bunching strategies, particularly for higher-income taxpayers.
8. Tax Rate, NIIT and Medicare Tax Planning
Monitoring and managing modified adjusted gross income (MAGI) is a critical component of year-end tax planning. Higher MAGI levels can trigger the 3.8% Net Investment Income Tax (NIIT) and the 0.9% additional Medicare tax, increasing overall tax liability.
Strategic planning may include shifting investment types, deferring income, or bunching deductions to keep MAGI below key thresholds. Managing taxable income can also allow individuals to take advantage of the preferential long-term capital gains tax brackets (0%, 15%, or 20%). In some cases, realizing capital gains in lower-income years may help avoid the 3.8% NIIT altogether and improve overall tax efficiency.
9. Insurance and Liquidity Review
A year-end review of life, liability, and property insurance coverage helps ensure adequate protection and sufficient liquidity for estate settlement and family needs in the event of death or incapacity.
10. Review Estate Planning Documents
Wills, trusts, powers of attorney, and beneficiary designations should be reviewed regularly and updated as needed to reflect changes in family circumstances, financial goals, and tax law changes.
How We Can Help
Tax planning is most effective when it is proactive and personalized. If you would like help evaluating these strategies and identifying opportunities to reduce your tax liability, contact our firm to schedule a tax planning consultation.
