Strategies for Saving: Year-End Tax Planning for Individuals
Year end is here, but there’s still time for individual taxpayers to make moves to lower their 2025 tax bills. The One Big Beautiful Bill Act (OBBBA), which became law in July, provides some welcome certainty for the next few years. It also creates or enhances tax-planning opportunities. Here are some strategies to consider.
Alternate Standard and Itemized Deductions
The Tax Cuts and Jobs Act (TCJA) of 2017 approximately doubled the standard deduction amounts, and the OBBBA made those increases permanent — and further increased the amounts for 2025:
- $15,750 for single filers (up from $15,000 before the OBBBA),
- $23,625 for heads of households (up from $22,500), and
- $31,500 for married couples filing jointly (up from $30,000)
These amounts will be inflation adjusted for 2026 and beyond.
Important: Additional standard deduction amounts are allowed for individuals age 65 or older or blind. For 2025, the additional amounts are $2,000 for an unmarried individual age 65 or older or blind, or $1,600 for a married person filing jointly age 65 or older or blind. (These amounts are doubled if the individual is both over age 65 and blind.)
If your total itemizable deductions for this year will be close to your standard deduction, consider making enough additional expenditures for itemized deduction items between now and year end to surpass your standard deduction. The extra expenditures will allow you to itemize for 2025 and thereby reduce this year’s federal income tax bill. Next year, you can still claim the standard deduction allowance — which will be bigger thanks to the annual inflation adjustment — if that’s more beneficial than itemizing.
If your total itemizable deductions for 2025 already exceed your standard deduction, consider accelerating deductible expenses into 2025 to increase your itemized deductions. (But if you expect to be in a higher tax bracket in 2026, you may want to defer deductible expenses instead — deductions save more tax when your rate is higher.)
The easiest itemizable expense to accelerate into 2025 may be your January 2026 mortgage payment, if you have one. Prepaying in 2025 will give you 13 months of itemized home mortgage interest deductions in 2025 (if you made your January 2025 payment in 2025, not 2024). Although the TCJA put stricter limits on these deductions, which are continued under the OBBBA, you’re probably unaffected by those limits. (But check with your tax advisor to be sure.)
If you’re charitably inclined, another way to accelerate itemizable expenses into 2025 is to make donations (or bigger ones) between now and year end to IRS-approved charities. You can always make smaller donations next year to make up for it.
In addition, explore accelerating elective medical procedures, dental work and vision care expenditures into this year. If you itemize, you can deduct qualified medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).
Qualify for an Additional Deduction, If You’re a Senior
For 2025 through 2028, the OBBBA allows individuals age 65 and older to claim a “senior” deduction of up to $6,000, subject to an income-based phaseout. This deduction is available whether you itemize or not. If both spouses of a married couple filing jointly are age 65 or older, each spouse may be eligible for a separate senior deduction of up to $6,000 — for a combined total of up to $12,000.
However, the senior deduction is phased out when modified AGI (MAGI) exceeds $75,000 for single filers or $150,000 for married couples filing jointly. It phases out completely when MAGI exceeds $175,000 or $250,000, respectively. So, you may need to take steps to lower your MAGI to partially or fully benefit. For instance, you could claim capital losses to lower your MAGI while postponing Roth IRA conversions that would increase your MAGI. Your tax advisor can help you identify the right moves for your situation.
Benefit from the Bigger SALT Allowance
The TCJA limited state and local tax (SALT) deductions for itemizers to $10,000 per return ($5,000 for separate filers). For tax years 2025 through 2029, the OBBBA increases the SALT deduction cap to $40,000 per return ($20,000 for separate filers), with 1% annual inflation adjustments through 2029. Starting in 2030, the SALT deduction cap is scheduled to revert back to $10,000/$5,000 unless Congress takes further action.
However, it’s critical to watch out for the phaseout of the higher cap. For 2025, it begins to phase out when MAGI exceeds $500,000 ($250,000 for separate filers). The phaseout reduces the otherwise allowable SALT deduction cap by 30% of MAGI in excess of the applicable threshold, but not below $10,000/$5,000. Your tax advisor can help you assess whether you’ll be affected by the phaseout and suggest ways to avoid or minimize it by lowering your MAGI.
Certain business owners may benefit from SALT deduction workarounds. The OBBBA doesn’t limit or address such workarounds for pass-through entities that several states have established. Generally, these workarounds allow partnerships, S corporations and limited liability companies that are treated as partnerships for tax purposes to pay SALT bills on their income and then pass through the SALT payments as deductible expenses to their individual owners. By doing so, they avoid SALT deduction caps that would otherwise apply to the owners. If you could take advantage of such a workaround but haven’t yet taken the necessary steps, ask your tax advisor for help acting before year end.
Manage Investment Gains and Losses Wisely
So far this year, the stock market has generally surged. You may have already sold some appreciated investments and realized gains, but you may also have unrealized gains. And you might have sustained a few losses, some of which may be unrealized.
If you hold investments in taxable brokerage firm accounts, consider the tax-saving advantage of selling appreciated securities after you’ve held them for more than 12 months. Such net long-term capital gains are subject to the applicable long-term capital gains rate rather than your higher ordinary income rate.
The long-term gain rate is 15% for most individuals, though it can reach the maximum 20% rate at high income levels. (See “2025 Federal Tax Rates and Brackets for Individuals” below.) The additional 3.8% net investment income tax can also kick in. So, the actual effective federal income tax rate on long-term capital gains can be 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) at high income levels. Still, that’s much better than the 40.8% maximum effective rate that can apply to short-term capital gains (37% + 3.8%).
If you’re holding some “loser” investments (that is, investments currently worth less than you paid for them), consider selling them to recognize capital losses. This time-honored tax-saving strategy is called “harvesting losses.” Practicing it can lessen the capital gains impact of selling appreciated investments this year. Offsetting short-term capital gains with harvested losses is an especially tax-smart move, because they’re subject to higher tax rates.
If harvesting losses would cause your 2025 capital losses to exceed your recognized 2025 capital gains, the result would be a net capital loss for the year. That’s OK! The net capital loss can be used to offset up to $3,000 of higher-taxed 2025 ordinary income from salaries, bonuses, self-employment income, interest income, royalties and other qualified sources. (Note: The limit is $1,500 for separate filers.) Any excess net capital loss is carried forward to the next year.
Give Away Investments With Care
Are you an investor who’s interested in donating to charity? If so, look for ways to combine generosity with tax-savvy approaches to your taxable brokerage account stock and equity mutual fund portfolios. Donating investments directly to charity can make sense, but not always.
For example, don’t donate loser investments. Instead, sell the shares so you can claim the resulting tax-saving capital loss. Then donate the proceeds to claim the resulting tax-saving charitable deduction, assuming you itemize. Following this strategy delivers a double tax benefit: tax-saving capital losses plus tax-saving charitable deductions.
Follow the opposite strategy with appreciated publicly traded stock. Donate shares to charity instead of giving cash. Why? Because you can claim a charitable deduction equal to the full current market value of the shares at the time of the donation, assuming you itemize and you’ve owned the shares for more than a year. Plus, when you donate appreciated shares, you escape any capital gains tax on those shares that you’d owe if you sold them. So, this idea is also a double tax-saver: You avoid capital gains tax, and you get a tax-saving charitable deduction.
Important: Starting next year, two unfavorable OBBBA changes will reduce allowable itemized deductions for charitable contributions. But donations made this year are unaffected. So, if you itemize, consider bulking up on charitable gifts between now and year end.
Another tax-advantaged donation option is to make charitable gifts from your IRA. If you’ve reached age 70½, you can make 2025 cash donations totaling up to $108,000 to IRS-approved public charities directly out of the IRA. These so-called qualified charitable distributions (QCDs) aren’t included in your taxable income for federal tax purposes. You get no itemized charitable deduction, but that’s OK because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can reduce or postpone itemized charitable deductions. QCDs have other tax advantages, too. For example, they reduce your MAGI, which can help preserve your eligibility for various tax breaks. Ask your tax advisor for further details.
Finally, if you intend to give gifts of investments to loved ones rather than donate them to charity, follow the same general strategy. Give away appreciated shares to family members in lower tax brackets to reduce or eliminate capital gains tax liability. (But watch out for the “kiddie” tax.) Or sell loser shares to harvest the resulting tax-saving capital losses, then give the sale proceeds to your loved ones.
Leverage Liberalized Rules for 529 Plans
If you’d like to help fund your children’s or grandchildren’s elementary or secondary school education, you may want to increase 529 plan contributions this year in light of some OBBBA changes. The contributions aren’t deductible for federal tax purposes, but some states do offer tax breaks for contributing. And distributions used for eligible education expenses are tax-free.
For 2025, tax-free treatment is allowed for up to $10,000 in 529 plan distributions to cover qualified expenses for enrollment in or attendance at elementary or secondary schools (K-12 schools). For distributions from 529 plan accounts taken on or before July 4, 2025, only tuition is considered a qualified K-12 expense. But for distributions taken after July 4, 2025, the OBBBA expands the definition of qualified K-12 expenses to include:
- Curriculum materials,
- Fees for nationally standardized tests,
- Books and other instructional materials,
- Dual-enrollment fees for college courses taken in high school,
- Online educational materials,
- Tutoring or educational classes taken outside the home, and
- Specialized strategies to support students with disabilities.
Starting next year, the OBBBA allows tax-free treatment of up to $20,000 in distributions for qualified K-12 school costs.
For distributions taken after July 4, 2025, the OBBBA also allows tax-free treatment for distributions to cover qualified postsecondary credentialing expenses. These generally include:
- Tuition and fees,
- Books, supplies and equipment required for the designated account beneficiary’s enrollment or attendance in a recognized postsecondary credential program,
- Fees related to testing required to obtain or maintain a recognized postsecondary credential, and
- Fees for continuing education required to maintain a recognized postsecondary credential.
Contributing to 529 plans continues to provide a tax-advantaged way to fund traditional college costs as well.
Grab “Green Energy” Credits While You Can
Under the OBBBA, two tax credits for homeowners are scheduled to expire after this year. First, the OBBBA repeals the energy efficient home improvement credit — which offers small tax savings for upgrades such as insulation, windows and doors — for any qualifying items placed in service after this year.
Second, and more important, the OBBBA repeals the residential clean energy credit for any expenses paid after this year. This tax break can provide more substantial savings for big-ticket items such as solar panels, battery storage and geothermal systems.
In any case, once this year ends, both credits go away. You must act very soon to benefit from these potentially valuable tax-saving opportunities.
Don’t Go It Alone
Year end is always a critical time for tax planning. But now that the OBBBA has reshaped the tax landscape, timely action matters more than ever. Use the remainder of the year to review your financial picture and strategize tax-savvy moves for your 2025 return. And don’t go it alone: Work closely with your tax advisor to put yourself in the strongest possible position.
| 2025 Federal Tax Rates and Brackets for Individuals
The One Big Beautiful Bill Act permanently extends the individual federal income tax rates established under the Tax Cuts and Jobs Act. The thresholds for these rates are annually adjusted for inflation. The new law makes no changes to the federal income tax treatment of long-term capital gains and qualified dividends. For 2025, the rate brackets are as follows: 2025 Federal Tax Rates on Ordinary Income and Short-Term Capital Gains
2025 Federal Tax Rates on Long-Term Capital Gains and Qualified Dividends*
*Different rates and rules apply in certain circumstances, such as gains on collectibles, gains attributable to certain depreciation recapture and gains from selling qualified small business stock. The 3.8% net investment income tax applies to net investment income to the extent that modified adjusted gross income exceeds $200,000 for single filers and heads of households, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. |