Finalize Your Year-End Tax Plans to Set 2025 Off On the Right Foot

Tax strategies shouldn’t be set in stone. If you commit to reviewing your tax plan every year, you can make small adjustments as your needs and goals shift, and you can incorporate new tax strategies if legislation changes. This year there is a bit more uncertainty about future legislation, but there are still plenty of decisions you can make to build a rock solid tax plan.

Plan for cost-of-living adjustments.

In 2022, inflation reached its highest rate since the early 1980s, jumping to a whopping 8%. But in recent years, the inflation rate dropped back down to a more manageable level, so much so that the Federal Open Market Committee lowered interest rates by 50 basis points in September 2024, the Fed’s first interest rate drop in over a year.

What does this mean from a tax planning perspective?

Each year, the IRS adjusts its thresholds and tax ranges for inflation. This year’s adjustments were milder than in years past, but still worth noting. Here are a few:

Tax Brackets for Single Filers

Tax Brackets for Joint Filers

Standard Deduction

The standard deduction for the 2024 tax year has increased from $13,850 to $14,600 for single filers, and from $27,700 to $29,200 for joint filers.

Earned Income Tax Credit

The maximum EITC for 2024 is $7,830 for qualifying taxpayers, up from $7,430 in 2023.

Alternative Minimum Tax Exemption

The AMT exemption amount for 2024 has increased from 2023, as has the threshold at which the exemption phases out.

Fortunately, in 2024, most taxpayers will not be subject to the AMT. When Congress passed the Tax Cuts and Jobs Act (TCJA) at the end of 2017, it raised the exemption amounts and changed the calculation to be more taxpayer friendly. However, the TCJA provisions for the AMT expire at the end of 2025. Keep this in mind when planning for next year and the year after, because you may very well be subject to the AMT in 2026.

Make changes before year-end.

The end of the year is a great time to assess whether your current strategies are helping you reach your goal. Whether your goal is to reduce current year tax liabilities, set yourself up for a low-taxed retirement, or something else, consider some of the following tax strategies.

Fund retirement accounts.

Contributions to traditional IRAs, 401(k)s, and 403(b)s are deductible, which means that you can use contributions strategically to fine-tune your current year tax liability. Just keep in mind that in retirement, you’ll have to pay taxes on those contributions.

Even if your contributions aren’t deductible, it may be smart to fund your retirement accounts before year-end simply to give your account more time to grow tax deferred. It’s important to talk to an advisor you trust, because they can help you build a strategy that not only meets your financial needs today, but also meets your financial needs in retirement.

Contribute to education.

A 529 plan can be a great way to help your kids afford higher education. Contributions to 529 plans aren’t deductible, but the investment accounts grow tax-free. When the time comes for you to pull from the account, those earnings won’t be taxed at the federal level if you use them on higher education. Depending on your plan, you may even get a state tax break.

Each year, you can make 529 plan contributions up to the annual gift tax exclusion on behalf of one or more designated beneficiaries. This threshold, which is $18,000 in 2024, is available for each recipient, which means that if you want to contribute $18,000 to 529 plans that benefit each of your eight grandkids, you can do so without incurring gift tax. You can also elect to front load your gifts by contributing a lump sum of up to five times the annual gift tax exclusion ($90,000 in 2024). This election has a few stipulations, but it can be a great option if you want your contributions to begin accruing interest now.

Take distributions from retirement accounts.

Taxpayers are required to pull funds from their retirement accounts beginning at age 73. These required withdrawals, — called required minimum distributions (RMDs) — can boost your taxable income. Though you can’t typically avoid RMDs, if you don’t need them right away, there are a few things you can do to avoid paying taxes on those withdrawals.

• Donate your RMD to charity.
  If you are age 70 ½ or older, you can direct up to $105,000 of your RMDs to charity each year using a tax tool known as a qualified charitable distribution (QCD). As long as your donation is made to an eligible charitable organization and the distribution is made directly to the charity, you will not owe taxes on those distributions.
• Convert to a Roth account.
  RMDs are only required for traditional retirement accounts; Roth IRAs do not have the same distribution requirements. If you want, you can convert your traditional IRAs into a Roth. While you’ll have to pay taxes on the Roth conversion at the time you make the asset transfer, it may be a smart tax planning move for three main reasons.
  • First, you can pay those taxes at a time of your choosing rather than waiting for the IRS to choose for you. If it’s best for your tax position, you can convert all or only a portion of your IRA into a Roth. There’s no limit to the number of Roth conversions you can make, so this gives you greater control over your taxable income in the years prior to (and even during) retirement.
  • Second, your Roth account will grow tax free, and when you withdraw those funds, those distributions won’t be taxed.
  • Third, those accounts won’t be subject to RMDs in the future.
• Continue working.
  If you work in retirement, you’ll still need to take RMDs from IRAs. But if you have an employer-sponsored plan like a 401(k) and you don’t own more than 5% of that business, you can postpone your RMDs from that employer’s retirement plan until you stop working.

Give to charity.

If charitable giving is part of your financial plan, making charitable contributions before year-end will ensure you get a tax deduction. In general, you can donate up to 60% of your adjusted gross income to charity. You can donate directly to a qualified charity, or you could consider using:

• Donor advised funds
• Charitable trusts
• Private foundations

Consider upcoming tax reform.

With the election close at hand, 2025 holds a lot of uncertainty. But as it stands, there are some known changes coming down the pike. A few of the following TCJA-era tax provisions are expiring in 2025:

• The TCJA increased the standard deduction beginning in 2018. The expanded deduction will expire at the end of 2025, which may mean that you’re better off itemizing deductions in 2026.
• The TCJA created a $10,000 cap on the state and local tax (SALT) deduction. This expires at the end of 2025, which means that larger SALT deductions will be available to you in 2026 should you itemize your deductions.
• The TCJA boosted the child tax credit in 2018 from $1,000 to $1,400. The expanded credit expires in 2025.
• The TCJA boosted the alternative minimum tax (AMT) exemption, but in 2026, the AMT exemption will fall back down again, making more taxpayers subject to the AMT.
• The TCJA nearly doubled the estate tax exemption. Talk to an advisor to see if you can take advantage of this exemption before it is reduced again in 2026.

Build a tax strategy that works for you.

The same tax strategy won’t work for everyone. We understand all our clients have different goals, family needs, and lifestyles. That’s why we work hard to build a strategy that’s unique to you. For more information on finalizing your year-end tax plans to start 2025 on the right foot, contact us.