As the calendar winds down, now is the time to take proactive steps that can lower your 2025 tax bill and set you up for success in 2026.
Here are a few key strategies to consider before December 31:
Maximize Retirement Contributions
Boost your savings and reduce taxable income by contributing to tax-advantaged accounts. For 2025, you can put up to $23,500 into your 401(k), plus an extra $7,500 if youโre 50 or older. Donโt forget IRAs ($7,000) and HSAs ($4,300 for individuals, $8,550 for families). These moves not only cut taxes but also grow your nest egg for the future.
Consider a Roth Conversion
If you expect higher tax rates later, converting traditional IRA funds to a Roth IRA now could be smart. The conversion must be completed by December 31 to count for this tax year. This strategy works best in lower-income years or when markets dip. Roth IRAs and 401(k)s offer some distinct advantages over traditional 401(k)s and IRAs, so make sure you make an educated and informed decision on which to use.
Harvest Tax Losses
Selling investments that have lost value can offset capital gains and reduce taxable income by up to $3,000. Review your portfolio and act before year-end to lock in these benefits. The market saw significant volatility in many โcocktail partyโ stocks, especially toward the end of the year. Selling now could help offset future gains (reminder โ crypto is not considered a security, so you can sell now, lock in losses, and repurchase immediately. Wash sale rules do not apply).
Accelerate Deductions
With the SALT deduction cap raised to $40,000, pre-paying property taxes or state income taxes can maximize your itemized deductions. Similarly, charitable contributions โ whether direct gifts or funding a Donor-Advised Fund โ must be made by December 31 to qualify for 2025 deductions.
Take Advantage of Energy Credits
Installing energy-efficient home improvements like insulation, windows, or solar panels before year-end can earn you up to $3,200 in credits. These incentives help the planet and your wallet.
Donโt Forget FSAs and RMDs
Use any remaining Flexible Spending Account funds before they expire. If youโre 73 or older, ensure you take your Required Minimum Distribution to avoid steep penalties.
Business Owners: Act Now
If you run a business, consider pre-paying expenses such as rent or insurance to accelerate deductions. Buying and placing equipment in service by December 31 can qualify for Section 179 or bonus depreciation, allowing you to deduct the full cost this year.
Estate and Gift Planning
The annual gift exclusion for 2025 is $19,000 per recipient. Making gifts before year-end can reduce your taxable estate. With lifetime exemptions at historic highs, now is an ideal time to transfer wealth strategically.
Bottom Line
These moves can significantly reduce your tax liability and strengthen your financial position. Consult with a tax professional to tailor these strategies to your situation โ and act before December 31 to make them count.
This information is for educational purposes only and does not constitute investment, legal, or tax advice. You should consult a qualified financial advisor, tax professional, or attorney before making any financial decisions related to a Roth IRA. Converting a traditional IRA or other tax-deferred account to a Roth IRA is a taxable event and may increase your current-year tax liability. Roth conversions cannot be undone.
