Year-End Tax Planning Post-Election
Friends – This is my eighth year sharing a year-end planning checklist and it seems every year has its own unique set of circumstances. With the election now behind us, focus has shifted to the future and potential changes to tax laws going forward.
Many provisions tied to The Tax Cuts and Jobs Act of 2017 are scheduled to expire at the end of 2025. Given the outcome of the election, most are now speculating that these tax cuts will either be extended or modified in some way. And while we won’t know the specifics for some time, there is a significant amount of proactive planning we can do before year end to best position ourselves to save on taxes, regardless of future legislation.
Below are some of the top topics we are discussing with clients as we approach 2025. As always, if you are unsure about any of these topics in any way, please do not hesitate to reach out. I’m always happy to help.
Harvest Tax Losses - Tax loss harvesting is one of the most timely opportunities to consider each year. Given the rise in interest rates over the past few years, many investors have losses available to harvest in the bond portion of their portfolios, which can be more complex and should be considered carefully. Additionally, automating loss harvesting year round via direct indexing can significantly benefit investors.
Contribute to 401(k)s, IRAs and other retirement accounts - As always, maximizing contributions to these accounts can reduce your taxable income and give your retirement savings a boost. The contribution limits for these accounts are indexed to inflation, which means after an increase for 2024, limits are going up again for 2025 – up to $23,500 to 401(k)s or $31,000 if you’re 50 or older in 2025. Limits for HSAs and other important accounts are similarly higher in 2025 while limits on IRAs remain the same.
Take Advantage of Health Savings Accounts (HSAs) - HSAs continue to grow in popularity and are still the best deal going to save and invest. You can read more about HSAs in one of my most recent blog posts.
Plan for a Bonus - If you receive a portion of your compensation as a year-end bonus or have another lump sum to invest, review my previous post with tips on how to best allocate it.
Assess Your Tax Efficiency - If you own mutual funds in taxable accounts, it is likely you’ll still receive some type of year-end capital gain distributions that you owe taxes on – this can be avoided in the future. Not all investments are created equal in this regard and a careful review may identify opportunities to save on taxes going forward. I’ve written about assessing your portfolio’s overall tax efficiency previously.
Consider Municipal Bond Income - While many investors have enjoyed higher interest payments from their cash and bond investments over recent years, many have also been surprised when they owe significant taxes on this income. By utilizing municipal bond options for these investments, you can generate tax-free income and may realize a great after-tax return, depending on your tax bracket.
Give Thoughtfully to Charity - I’ve written about this topic in more depth in previous years. If you’re making any gifts in the near future, please review my tips on tax-efficient giving.
Take Required Minimum Distributions (RMDs) - If applicable, don’t forget to take required distributions from retirement accounts to avoid up to a 50% penalty on undistributed amounts. If you give to charity, using qualified charitable distributions (QCDs) can be a highly advantageous way to satisfy RMD requirements while making year-end gifts.
Complete Annual Gifting - For investors who may have a taxable estate in the future, taking advantage of annual gifting limits to family members, trusts or other recipients can be an effective way to limit future estate taxes. In 2024 the gift tax limit is $18,000 per recipient or $36,000 for married couples (rising to $19,000 / $38,000 respectively in 2025). Tuition payments and medical expenses made directly to institutions can also be made above these limits.
Consider a Roth Conversion - Depending on a number of circumstances, converting a portion of a traditional IRA to a Roth IRA can provide significant tax advantages. These decisions are quite complex, however, so we always recommend seeking informed advice before doing so.
Plan Ahead for Itemized Deductions - Given the significant increase in the standard deduction, and the limitation on property tax deductibility, far fewer taxpayers find themselves itemizing deductions on their tax returns these days, meaning deductions for things like charitable giving and mortgage interest often go unused. More often than not, it now makes sense to plan ahead and consider “bunching” together these deductions to itemize one year and use the standard deduction in others, providing for greater overall tax savings. Like many of these topics, these decisions can be complex and should be considered with input from relevant professionals.
Re-Assess Withholding - If you have been surprised by a larger than expected tax bill in recent years, it may be due to underwithholding taxes from your paychecks as they are received. Working with your CPA and payroll department to ensure you’re withholding enough is important to avoid a surprise tax bill come April, or worse an additional underpayment penalty.
Look Ahead to Future Years - The complexity involved with tax planning means it is no longer something that can be done one year at a time. Planning should now take a longer term perspective and be thoughtfully coordinated over multiple tax years, whether through accelerating or deferring income, “bunching” deductions or other strategies.
