Ever feel like the holiday season is too quiet? Maybe not enough going on? Boring, even?
Well, I have a little gift for you. It’s the perfect time to add some year-end tax planning to your life!
And for a few reasons...
- As the year comes to a close, you have a pretty good idea of what your actual income will look like, along with other variables that impact your tax outcome.
- With the new year just around the corner, you likely have a sense of how things will look in comparison to the one that’s closing out.
- Occasionally, in years such as this, there is new legislation that creates opportunities and/or hurdles to consider from one year to the next.
Here are 7 end-of-year tax planning strategies to consider as 12/31 approaches:
- Compare your total estimated tax bill to your actual taxes paid
- Top off tax-advantaged investment accounts
- Optimize 529s for state income tax deductions or credits
- Explore opportunities for tax-loss harvesting
- Consider tax-gain harvesting
- Assess the potential for Roth conversions
- Maximize your charitable donation strategy
Compare Your Total Estimated Tax Bill to Your Actual Taxes Paid Before December 31st
For starters, it’s helpful to have a heads-up on where you stand with Uncle Sam. Have you overpaid, putting you on pace for a large refund? Have you not paid enough to the IRS, potentially even exposing yourself to an underpayment penalty? Not only do we want to eliminate surprises, but also allow for enough time to make some final adjustments before the year closes.
Most people – as employees of a company – have money automatically taken out of their paychecks to cover federal taxes and state taxes. But simply having it withheld doesn’t mean it’s the right amount, especially if you have other types of income aside from your salary. Other individuals, such as business owners, those with large amounts of investment income, or people with supplemental income like RSUs, may be making quarterly estimated tax payments. But again, as things shift throughout the year, it’s necessary to confirm you’ve been paying an appropriate amount.
End-of-year projections can be very powerful
Here at Upbeat Wealth, we run tax projections for all of our planning clients toward the end of the year to assess where they stand with the IRS. If you want to give it a shot on your own, check out the IRS’s tax withholding estimator tool.
At a minimum, you’ll want to be sure you’re going to cross over the Safe Harbor threshold
If you don’t give the IRS enough of your total tax liability during the calendar year, they will assess an underpayment penalty. The key here is that the IRS likes to get its taxes when the income is earned. To avoid a penalty, the IRS (and states) have the Safe Harbor rule for determining the minimum you need to pay. You won’t be penalized if you meet at least one of the following:
- Owe less than $1,000 in tax for the current year.
- Pay at least 90% of the total tax bill for the current year.
- Pay at least 100% of the tax you owed for the previous year. This bumps up to 110% of the previous year’s tax bill for those with an AGI over $150k (over $75k if married filing separately).
Making sure you’re in the clear with this rule can protect you from paying any extra amount to the IRS in the form of penalties.
Top Off Tax-Advantaged Investment Accounts
Now is a great time to see how you’re doing with contributions to certain investment accounts that have a December 31st deadline for the tax year. These include:
- Employee contributions to workplace retirement plans, such as a 401k, 403b, etc.
- Health Savings Account (to make the contributions via payroll deductions, which allows you to avoid FICA taxes on the amount contributed)
These accounts have a maximum annual contribution limit set by the IRS (which is typically adjusted every year or two). If you’re not already on a path to hit that amount, consider adjusting your payroll deferral percentage to direct surplus cash flow into any of these accounts you have access to so you can get there by year’s end.
What are the annual IRS contribution limits?
- 2025 Max for 401ks and 403bs
- $23,500
- + $7,500 for age 50+ ($31,000 total)
- + $11,250 for ages 60-63 ($34,750 total)
- 2025 Max for HSAs
- Self-Only: $4,300 (+ $1,000 for age 55+)
- Family: $8,550 (+ $1,000 per eligible spouse age 55+)
On a separate note, keep an eye on the balance in any Flexible Spending Accounts since these are of the “use-it-or-lose-it” variety.
Optimize 529s for State Income Tax Deductions or Credits
If you’re saving into a 529 for your child’s education, or plan to, take a close look at your home state’s tax rules. Over 30 states offer either an income tax deduction or credit for contributions made to a 529 if it’s established through their own program. The available benefits are different from state to state.
Explore Opportunities for Tax-Loss Harvesting
If you have any losses in a taxable brokerage account, you can benefit from “capturing” (or harvesting) those investment losses. By selling a position that is in the red, you “realize” that loss (considered “unrealized” until a sale occurs) and can use it to offset other investment gains you may have realized during the year. If you don’t have any gains to knock down (or if your losses exceed your gains), you can use up to $3,000 of investment losses ($1,500 if filing MFS) to reduce your ordinary income for the year, carrying any remaining losses into future years for use.
Example:
Let’s say Marcus sold “investment X” earlier in the year for a gain of $5,000.
At the end of the year, he sells “investment Y” and realizes a loss of $12,000.
When preparing his taxes, he can use his $12k in losses to “offset” his $5k in gains. This results in a net $0 of investment gains for the year, thus no taxes on that investment income.
Now, he still has $7k of unused losses. He can use $3k of that to reduce his income for the year. Finally, he has $4k in losses that will carry forward to the next tax year.
The Finer Details
When doing the math, you have to first net short-term capital losses against short-term capital gains. Then, separately do the same with long-term capital losses and long-term capital gains. Next, you net those two amounts against each other (if you have a gain/loss for each).
At tax time, Form 8949 and Schedule D are used to report your capital gains and/or losses.
Be careful with the Wash Sale Rule
What the rule says: If you buy the same investment, or a “substantially identical” security, within a 30-day window before or after selling it at a loss, then that loss is disallowed. That means you miss out on the tax benefit. In other words, you cannot use that loss to reduce other investment gains or income. An important note is that the rule applies across all accounts that both you and your spouse own, if you’re married.
Crypto is different
Notably, the wash sale rule does not apply to cryptocurrency. Therefore, you could sell a cryptocurrency at a loss and then immediately repurchase it that same day while still being able to use that captured loss against other gains or income.
Consider Tax-Gain Harvesting
If your income is relatively lower this year compared to others (think: sabbatical, time between jobs, back in school, etc.), and you’ve moved down to a lower long-term capital gains tax bracket, then you may have a nice opportunity to sell appreciated taxable investments and pay taxes at a lower rate.
Did you know? In 2025, if your income is under $48,350 (single) or $96,700 (MFJ), you are in the 0% long-term capital gains tax bracket. Meaning you’d have the chance to sell some investments with a gain at a 0% tax rate!
2025 Long-Term Capital Gains Brackets
- Single Filers
- 0%: ≤ $48,350
- 15%: $48,351 – $533,400
- 20%: > $533,400
- Married Filing Jointly
- 0%: ≤ $96,700
- 15%: $96,701 – $600,050
- 20%: > $600,050
Assess the Potential for Roth Conversions
Do you have money in a pre-tax retirement account that you’d like to move over to a Roth? If so, there are a couple of times where doing so can make even more sense from a tax standpoint:
- When you’re in a relatively lower-income year
- When the stock market is down
Here’s another case where a lower-income year may bring some opportunity. In this case, you’ll want to focus on your ordinary income tax bracket, since this is what’s applied to any amounts converted from a pre-tax retirement account to a Roth. If you do find yourself in this position, you could consider taking advantage of any room left in that relatively lower tax bracket to pay less taxes on the conversion than you would in more “typical” years.
And if the stock market is down, resulting in a lower balance in the account, there’s simply less income produced in the process of converting, compared to when the account balance is higher. In other words, it makes the tax on the conversion cheaper.
If you plan on executing a Roth conversion, make sure you have the cash on hand to pay the tax bill.
Maximize Your Charitable Donation Strategy
If charitable giving is part of your routine, then it pays to examine your strategy through a tax lens as we near year’s end, especially in 2025. In particular, the passage of the OBBBA over the summer came with a handful of specific updates impacting how you should think about charitable donations. Let’s look at each here:
The standard deduction for this tax year is $15,750 (single) and $31,500 (MFJ).
- Therefore, your total itemized deductions (which can include donations to charity) would need to exceed those levels in order for itemizing to save on taxes.
- If your typical single-year donation amount doesn’t move the needle on your total itemized deductions above the standard amount, then “bunching” might be worth exploring. This involves combining the amount you would normally donate across multiple years into a single one.
The cap for the state and local tax (SALT) deduction was raised from $10,000 to $40,000 (though it phases out for those with a MAGI of $500k and goes back down to $10k when MAGI hits $600k).
- So for those with higher state and local taxes, that can much more easily push you into itemizing territory when adding in charitable contributions.
Beginning in 2026, you’ll only be able to deduct contributions that surpass 0.5% of your Adjusted Gross Income (AGI).
- This means the same contribution will count for less on your taxes in 2026 than it will this year.
- This is another reason for some filers to consider the “bunching” approach mentioned above. More specifically, moving what you’d normally donate in 2026 forward into 2025 and combining it with this year’s annual giving could easily produce a better tax outcome.
Also starting in 2026, itemized deductions will be capped at 35% for those in the 37% marginal bracket.
- Therefore, charitable donations will be slightly less impactful from a tax standpoint for those in the top bracket after this year.
- Yet another reason for those in the highest bracket to bunch into 2025.
For those who don’t itemize, starting in 2026, you will be able to deduct up to $1k (single) and $2k (MFJ) for donations directly to charity.
- If your typical donation amount doesn’t move the needle with itemizing over taking the standard deduction, and you haven’t yet completed your giving for 2025, consider delaying to January.
- If you don’t itemize, you can take a deduction in 2026 that you wouldn’t get this year.
Lastly, here’s a general refresher on how to make the most of charitable donations, including the details on donating appreciated investments to a donor-advised fund, another fantastic tax-planning move!
Year-End Tax Planning FAQ
Q1: Why is tax planning so important at the end of the year?
The end of the calendar year is when you have the most complete picture of your income, deductions, credits, investment performance, and so on. You should also have a general idea of what those same variables will look like in the coming year for comparison. This allows you to make the most tax-informed decisions within your financial plan.
Q2: What is year-end tax planning?
Year-end tax planning is the process of running projections and making adjustments before December 31st to reduce your current tax bill and avoid surprises at filing time.
Q3: Which accounts have a funding deadline of December 31st?
Any “employee” contributions to workplace retirement plans, such as 401ks and 403bs. Additionally, payroll deductions made to HSAs only count for the current year when made by 12/31 (though direct contributions can be made up until the tax filing deadline with FICA taxes owed on these amounts).
Q4: How do I avoid an IRS underpayment penalty?
You can avoid an underpayment penalty by meeting the IRS “safe harbor rule”, which can be done by paying at least 90% of your total current year tax liability, or at least 100% of the tax owed for the previous year. This jumps to 110% of the prior year’s tax bill if your AGI was over $150k (over $75k if married filing separately).
Q5: Is tax-loss harvesting worth it if I don’t have gains to offset?
Yes. If you don’t have capital gains, you can use up to $3,000 of investment losses each year to reduce ordinary income, with “unused” losses carried forward for use in future years.
Q6: When does a Roth conversion make sense?
Roth conversions often make the most sense in lower-income years or during market downturns, when the tax cost of converting those pre-tax dollars is relatively lower than it may be in other years (as long as you have the cash to pay the taxes).
Eddy Jurgielewicz, CFP® is a Partner and Lead Financial Planner at Upbeat Wealth, a fee-only firm based in New Orleans and serving clients virtually across the country. He specializes in providing straightforward financial guidance to ambitious young families as they navigate life’s many milestones.
Do you have questions about what we shared in this post, or anything else in general? Feel free to schedule a free consultation or drop us a line!
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