Year-End Tax Planning Basics

Bringing Your Financial Future Into Focus

The window of opportunity for many tax-saving moves closes on December 31, so it's important to evaluate your tax situation now, while there's still time to affect your bottom line for the 2025 tax year.

New this year

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, added several new provisions and modified others. These changes have a significant impact on year-end planning.

• The standard deduction amount has been increased to $15,750 in 2025 ($31,500 if married filing jointly, $23,625 if head of household).
• A deduction of up to $25,000 for qualified tip income is available for tax years 2025 through 2028. This deduction phases out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 (single filers) or $300,000 (joint filers). Married individuals must file a joint return to claim the deduction.
• A new deduction for qualified overtime pay required by the Fair Labor Standards Act (FLSA) is available up to a maximum of $12,500 for single filers and $25,000 for joint filers. This deduction also phases out for taxpayers with MAGI over $150,000 (single) or $300,000 (joint), is available for tax years 2025 through 2028, and is not available for married individuals who file separately.
• Individuals age 65 and older can claim an additional deduction of $6,000 each ($12,000 for a married couple if both are age 65 or older). This is on top of the existing standard deduction for seniors and phases out for single filers with MAGI over $75,000 and joint filers with MAGI over $150,000.
• A deduction of up to $10,000 in interest paid on loans for qualifying new vehicles that underwent final assembly in the United States may be claimed. This is available for both itemizers and non-itemizers and phases out at MAGI over $100,000 (single) or $200,000 (joint).
• The maximum amount that can be claimed as an itemized deduction for state and local taxes paid is temporarily increased from $10,000 to $40,000 starting in 2025. This deduction cap is reduced, but not below the original $10,000 limit, for taxpayers with a MAGI over $500,000 ($250,000 for married filing separately).

Timing is everything

Consider any opportunities you have to defer income to 2026. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there's a chance that you'll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2025. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year's charitable contribution this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2025 and postponing deductible expenses to 2026. That might be the case, for example, if you can project that you'll be in a higher tax bracket in 2026; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the AMT

Make sure to factor in the potential impact of the alternative minimum tax (AMT) when planning year-end moves. If you're subject to the AMT, traditional strategies — such as deferring income or accelerating deductions — can sometimes backfire. The AMT, which operates as a separate parallel tax system with its own rates and rules, does not allow several common itemized deductions, including the deduction for state and local taxes paid. So, if you're subject to the AMT in 2025, prepaying 2026 state and local taxes won't reduce your 2025 liability and could even hurt your 2026 results.

Changes made by OBBBA to AMT thresholds and limitation formulas are expected to make more high-income taxpayers subject to the AMT starting in 2026. This means it's especially important to evaluate your potential AMT exposure both this year and for 2026 and to adjust your timing strategies accordingly.

Special concerns for higher- income individuals

Starting in 2026, individuals in the top 37% marginal tax bracket will be subject to a new limitation on itemized deductions — the benefit of each dollar of itemized deductions will be capped at 35¢. If you're in the top bracket, accelerating itemized deductions into 2025 could be particularly beneficial.

The top marginal tax rate (37%) applies if your taxable income exceeds $626,350 in 2025 ($751,600 if married filing jointly). Additionally, long-term capital gains and qualifying dividends are generally taxed at a maximum 20% tax rate if your taxable income exceeds $533,400 in 2025 ($600,050 if married filing jointly).

A 3.8% net investment income tax (unearned income Medicare contribution tax) may also apply to some or all of your net investment income if your MAGI exceeds $200,000 ($250,000 if married filing jointly).

Note: High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly).

IRAs and retirement plans

Consider taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans, such as 401(k) plans, allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, helping to reduce your 2025 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren't deductible or made with pre-tax dollars, so there's no tax benefit for 2025, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2025, you can contribute up to $23,500 to a 401(k) plan (more if you're age 50 or older) and up to $7,000 to a traditional IRA or Roth IRA ($8,000 if you're age 50 or older). The window to make 2025 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2025 IRA contributions.

Roth conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account (if the plan permits), the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions). If a Roth conversion does make sense, you'll want to give some thought to the timing of the conversion. For example, if you believe that you'll be in a more favorable tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. (Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates.)

Charitable giving

For 2025, you have to itemize deductions to deduct charitable contributions, but starting in 2026, you'll be able to deduct up to $1,000 in cash donations ($2,000 for married joint filers) to qualified charities. If you don't itemize deductions for 2025, you might consider postponing cash contributions until 2026.

Also starting in 2026, for taxpayers who itemize, qualified charitable donations will only be deductible to the extent they exceed 0.5% of AGI. For example, a taxpayer with AGI of $100,000 can deduct the amount of their qualified contributions minus $500. This could be a factor in weighing whether to make charitable gifts in 2025 instead of waiting until 2026.

Talk to a professional

When it comes to year-end tax planning, there's always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.