As the end of the year approaches, it’s time to make sure you’re taking advantage of every opportunity to reduce your tax bill for the upcoming tax year. From strategic gifting and charitable donations to payroll deductions and Roth conversions, here’s your comprehensive guide to getting a head start on 2025 tax season.
Annual Gift Tax Exclusion
The annual gift tax exclusion for 2025 will increase to $18,000 for individuals and $36,000 for married couples. You can gift up to these amounts to your loved ones, tax-free, by December 31 to qualify for the 2025 exclusion. Gifting now can reduce your taxable estate, so don’t wait to make these tax-free transfers if this is part of your tax strategy.
Charitable Donations
Donations to qualified charities can provide valuable tax deductions, helping reduce your taxable income. You can claim these deductions by itemizing on Form 1040 and Schedule A. Be sure to save all records, including bank receipts, payroll deductions or any written communication with the charity. Your phone bill can serve as proof for donations made via text messages if it lists the charity, amount donated and donation date. Remember that if you receive anything in return, such as tickets or goods, you can only deduct the donation amount that exceeds the fair market value of what you received.
Optimize Payroll Deductions and Employer Benefits
Maximize your workplace benefits, such as your 401(k), Health Savings Account (HSA) or Flexible Spending Accounts, to reduce your taxable income. If you’re 50 or older, take advantage of catch-up contributions: an extra $7,500 for 401(k) accounts and $1,000 for HSAs if you’re over 55. Maxing out these contributions lowers your taxable income and provides a great way to boost retirement savings.
If you’re 72 or older, you must take RMDs from traditional retirement accounts before year-end. Failing to do so could result in a hefty excise tax. Taking RMDs on time helps you avoid penalties and aligns with IRS requirements.
Roth IRA Conversion
A Roth conversion can offer tax-free withdrawals in retirement and reduce future RMDs. It’s especially useful in years when your income is lower than usual or if you’re retired but haven’t yet started claiming Social Security.
Tax advantages include:
- Future tax-free withdrawals.
- Flexibility in managing retirement income.
- No RMDs during your lifetime, giving you more control over withdrawals.
529 College Savings Plans
Contributions to a 529 college savings account can grow tax-free if used for qualified educational expenses. Many states also offer tax deductions or credits for contributions, including Missouri, Arkansas, Illinois, Iowa, Kansas and Nebraska. A full list of states with 529 college savings plans can be found here.
Contributions made before the end of the year can not only support future education costs but also potentially lower your tax bill. The IRS also allows unused funds from a 529 to roll over into a Roth IRA, adding flexibility to your education savings.
Dependent Taxpayer IDs
For those with dependents, including children, make sure you have their Taxpayer Identification Numbers (TINs) before filing your return. TINs are essential for claiming any dependent credits, like the Child Tax Credit. If you’re expecting or recently welcomed a new child, apply for their Social Security Number right away. Filing for an extension is recommended if you don’t have the required TIN by the tax deadline, filing without it will result in credit denial.
Home Office Deduction
If you run a business from home or spend a significant amount of work hours working from a home office, you may be eligible for the home office deduction. Qualifying expenses, like rent, utilities, insurance and housekeeping, can be partially deducted based on the square footage of your dedicated office space relative to your home’s total area. To qualify, your home office must be exclusively used for business activities.
Tax-Loss and Tax-Gain Harvesting
Selling investments with losses (tax-loss harvesting) to offset gains can minimize your tax bill. However, be cautious of the wash sale rule, which disallows the deduction if you repurchase a “substantially identical” security within 30 days of the sale. Stock grants from your employer and dividend reinvestment programs may inadvertently trigger wash sales, so plan accordingly to avoid surprises at tax time.
Qualified Charitable Distributions (QCDs)
For taxpayers aged 70.5 or older, Qualified Charitable Distributions (QCD) from traditional IRAs offer a tax-efficient way to donate to charity and fulfill RMD requirements simultaneously. QCDs can help lower future RMDs by reducing the IRA balance. Using QCDs in place of cash donations can help retirees meet RMD obligations while supporting charitable causes in a tax-savvy way.
Anders Tax advisors regularly review the latest tax legislation to provide personalized, forward-thinking guidance for clients. Learn more about our tax planning services, and the associated costs, by requesting a meeting with an Anders advisor below.
