Overview

With 2025 soon ending, there is still time to take advantage of tax-saving ideas to lower your tax bill. Please note that The One Big Beautiful Bill Act (OBBBA) significantly changed many individual tax provisions by eliminating some tax-saving opportunities, adding new ones, and expanding others. Many of these changes are addressed below.

Key Considerations

Estimated Taxes/Adjusting Withholding

Did you owe money to the IRS or a state in 2024, or did you receive a big refund? If you had a balance due on your 2024 return, consider adjusting paycheck withholding (Form W-4) or nonwage income withholding (Form W-4P, Form W-4R) for the remainder of 2025, and/or making estimated tax payments, to avoid a 2025 balance due and a possible estimated tax penalty. You may avoid the penalty by paying at least 90% of the tax shown on your 2025 return or 100% of the tax shown on your 2024 return, whichever is less. The percentage increases to 110% of 2025 tax if adjusted gross income (AGI) on your 2024 return exceeds $150,000 ($75,000 if you are married filing a separate return).

Also factor in the 3.8% net investment income tax (NIIT), the receipt of unemployment benefits, distributions from IRAs and §401(k) plans (and any additional tax for early withdraw), sales of investment property, etc., when adjusting withholding or making estimated payments. In addition, factor in any IRA required minimum distribution (RMD) that you will receive in 2025.

Significant OBBBA Changes

The OBBBA terminated several energy-related credits: two as of September 30, 2025 (the Clean Vehicle Credit and the Previously-Owned Clean Vehicle Credit), and two as of December 31, 2025 (the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit).

At the same time, the OBBBA increased the state and local tax deduction limit (SALT cap) from $10,000 to $40,000, created or expanded credits and deductions for family expenses, education, and retirement, and also created new tip and overtime income deductions.

Basic Numbers You Need to Know

Adjusted Gross Income (AGI)

Because AGI affects many tax benefits, including IRA deductions and some tax credits, a key tax-planning consideration is to estimate both 2025 and 2026 AGI. When considering whether to accelerate or defer income or deductions (discussed further below), be aware of the impact this may have on AGI and the ability to maximize itemized deductions tied to AGI, like medical expenses. Your 2024 tax return, 2025 pay data, and other income- and deduction-related documents are good resources for estimating your AGI.

Tax Rates (Tax Brackets)

Another important consideration is your tax bracket: the tax rate for your last dollar of income. Although tax bracket income thresholds are indexed for inflation, if income increases faster than the inflation adjustment, you may be pushed into a higher bracket with a higher marginal tax rate. If so, the potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking the opportunity).

Alternative Minimum Tax (AMT)

AMT can be triggered by certain items. The goal should be to avoid this tax whenever possible. For 2025, AMT exemption amounts are $137,000 for joint returns and qualifying surviving spouses; $88,100 for unmarried individuals (other than surviving spouses); and $68,650 for married individuals filing separate returns. The alternative minimum taxable income (AMTI) exemption phase-out for 2025 begins at $1,252,700 for joint returns and surviving spouses and $626,350 for unmarried individuals and married individuals filing separate returns. The exemption is phased out completely at $1,800,700 for joint returns and surviving spouses; $978,750 for unmarried individuals (other than surviving spouses); and $900,350 for married individuals filing separate returns. Also, for 2025, non-refundable personal credits can offset an individual's regular tax and AMT liability, and capital gains will be taxed at lower favorable rates for AMT purposes.

For 2025, the amount of excess taxable income above which the 28% rate applies is $239,100 for married individuals filing joint returns and unmarried individuals (other than surviving spouses) and $119,550 for married individuals filing separate returns.

If you hold stock due to the exercise of an incentive stock option during 2025 that is now below the value at the exercise date (i.e., “underwater”), consider selling the shares before the end of the year to avoid the AMT due on the original exercise of the option.

Standard Deduction

Another key number is the standard deduction. The standard deduction is important for planning the timing of your itemized deductions because itemized deductions must exceed the standard deduction for their tax value to be maximized. For 2025, the standard deduction is: 

• $31,500 for married filing jointly and surviving spouses;

• $23,625 for heads of households; and

• $15,750 for all other taxpayers.

For 2025, the additional standard deduction for older taxpayers and the blind is $2,000 and $4,000 for older taxpayers who are also blind if unmarried and not a surviving spouse. For married filing separately or jointly, the amounts are $1,600 and $3,200 per qualifying person.

Income, Deductions, and Credits

Deferring Receipt of Income Until 2026

If you expect your AGI to be lower in 2026 than in 2025 or anticipate being in the same or a lower tax bracket in 2026, you may benefit by deferring the receipt of income until 2026. Deferring income is advantageous so long as the deferral does not bump you into a higher tax bracket in the succeeding year(s). Deferring income may be disadvantageous, however, if the deferred income is deferred compensation under a nonqualified deferred compensation plan subject to a special provision that makes the income includible in gross income and subject to additional tax.

If you are self-employed and file Schedule C (e.g., as a sole proprietor or single-member LLC) and operate on a calendar-year, cash-basis accounting method, consider delaying 2025 year-end billings to clients so that payments will not be received until 2026.

If you inherited an IRA and are subject to the 10-year rule, consider not taking a taxable distribution in 2025 if doing so will put you in a higher tax bracket or your income will be less in 2026.

Accelerating Receipt of Income into 2025

In limited circumstances, you may benefit by accelerating income into 2025. If you anticipate being in a higher tax bracket in 2026 than in 2025 or need additional income in 2025 to take advantage of an offsetting deduction or credit that will not be available in future tax years, then it may make sense to accelerate the receipt of income. However, accelerating income into 2025 may be disadvantageous if you expect to be in the same or lower tax bracket for 2026.

If you are self-employed, for example, it may be disadvantageous to accelerate income into 2025, even if you will be in a higher bracket in 2026, if the acceleration causes you to cross a threshold that would result in an offsetting reduction in the qualified business income (QBI) deduction. The QBI deduction phase-out thresholds for 2025 begin at $394,600 for married filing jointly, and $197,300 for all other returns.

Some ways to accelerate income into 2025 include: 

Year-End Bonuses: If your employer generally pays year-end bonuses early in 2026, see if you can have your bonus paid before the end of 2025.

Retirement Plan/IRA Distributions: If you are 59 ½ or older and participate in an employer retirement plan or have an IRA, consider taking any taxable withdrawals before 2026. You may also want to consider making a Roth IRA rollover distribution (discussed further below). If you inherited an IRA and are subject to the 10-year rule, consider taking a distribution before the end of 2025.

New Deductions for Tip Income and Overtime Income

If you earned tip income or overtime pay in 2025, you may be eligible for new deductions that can reduce your taxable income.

OBBBA created a tip income deduction capped at $25,000 annually for qualified tips paid to individuals in “traditionally and customarily tipped industries.” Thus, if you work in food service, at a beauty or barber shop, or in another establishment where workers customarily receive tips, you may be eligible. The deduction phases out for joint filers with AGI over $300,000 ($150,000 for single). You can take this deduction even if you don't itemize.

OBBBA also created an overtime deduction for qualified overtime compensation (excluding qualified tips). Employees other than “highly compensated employees” may deduct up to $12,500 of qualified overtime compensation ($25,000 on joint returns). You also can take this deduction even if you don't itemize.

Itemized Deduction Planning

Deduction timing is an important element of year-end tax planning. However, deduction planning can be complex due to AGI levels, AMT thresholds, filing status, and the standard deduction. In addition, an expense is deductible only in the year in which it is actually paid. Therefore, if you know your tax rate is going to increase in 2025, it may be a good strategy to accelerate spending into 2025 to take the corresponding expense deduction. Also, consider dating your checks and mailing them before the end of 2025.

If your itemized deductions are relatively constant and are close to the standard deduction amount, you will gain little or no benefit from itemizing deductions each year. However, simply taking the standard deduction each year means the potential loss of the benefit of itemized deductions that exceed the standard deduction.

To maximize the benefits of the standard deduction and itemized deductions, consider adjusting the timing of deductible expenses (bunching) so that they are higher in one year and lower the following year (or vice versa). You can accomplish this by paying deductible expenses in 2025 that might otherwise be paid in 2026, such as mortgage interest due in January 2026 or doubling up on charitable contributions every other year. For 2025, medical expenses, including amounts paid as health insurance premiums, long-term care insurance premiums, and dental insurance premiums are deductible only to the extent your total medical and dental expenses exceed 7.5% of AGI. “Bunching” medical and dental expenses in one calendar year also can help maximize the allowable deduction. If you anticipate a state income tax liability for 2025 and plan to make an estimated payment typically due in January 2026, consider making the payment before the end of 2025.

Consider making charitable contributions by the end of 2025 using a credit card if the bill will not have to be paid until 2026. A pledge to donate is not deductible unless actually paid by the end of 2025.

Investments

The timing of your investment activities can result in significant tax consequences. A key point to keep in mind when planning investment activity in 2025 is the extent to which you may have capital loss carryovers from your 2024 tax return. The following general rules apply for most capital asset transactions in 2025: 

• Capital gains on property held for one year or less (short-term capital gains) are taxed at your ordinary income tax rate; and

• Capital gains on property held for more than one year (long-term capital gains) are taxed at more favorable capital gains tax rates, depending on your regular income tax bracket.

  
  

For 2025, the maximum capital gains rate is 20% for a taxpayer with taxable income above $600,050 in the case of married filing jointly or as a surviving spouse, $300,000 in the case of a married individual filing a separate return, $566,700 in the case of an individual who files as head of household, or $533,400 in the case of any other individual. For taxpayers in the lower tax brackets, the capital gains rate is 0% or 15%, depending on your income and filing status.

Timing of Sales/Capital Gains and Losses

Pay attention to the holding period of your investments because long-term capital gains are taxed at preferential rates not exceeding 20%, whereas short-term capital gains are taxed at ordinary income tax rates. To avoid recognizing capital gains altogether, consider donating appreciated property to charity rather than selling it, especially if doing so may result in overall itemized deductions exceeding your standard deduction for 2025.

Also consider timing the sale of assets to have offsetting capital gains and losses. Capital losses may be fully deducted against capital gains and offset up to an additional $3,000 of ordinary income ($1,500 for a married individual filing separately). In general, when losses are taken, long-term losses are first matched against long-term gains, and short-term losses against short-term gains. If there are any remaining losses, they may be used to offset any remaining long-term or short-term gains, up to an additional $3,000 (or $1,500) of ordinary income. If you sell stock at a loss, you generally must wait 31 days before repurchasing the same stock or you will be subject to the wash sale rules, which would disallow the loss. You should work with your investment adviser on an overall strategy as well to better understand which of your investments may result in capital gain distributions and how all this fits with your other anticipated income sources in 2025.

Mutual Funds

Some mutual funds can generate a significant amount of short-term capital gains, which are taxed at your ordinary income tax rate. In addition, avoid purchasing mutual fund shares later in 2025, as such funds often declare capital gains distributions at year-end, and you will be taxed on the full distribution even though you may have held the shares only for a short period of time.

Interest and Dividends

Interest income earned on U.S. Treasury securities and bank certificates of deposit (CDs) with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until 2026. If there is a possibility of receiving dividends from a closely held company, weigh the timing of receipt of those dividends.

Sale of Principal Residence

Significant changes in property values in recent years may mean that you can sell your principal residence at a handsome profit over what you originally paid. However, you need to crunch the numbers to see if you may have a taxable capital gain on the sale. You can exclude no more than $500,000 of gain if married filing jointly and $250,000 for all other taxpayers.

Sale of Rental Property

Consider the capital gains implications for your 2025 taxes when selling your rental property. If you plan to buy another rental property, you might be able to avoid gain recognition on the sale (like-kind exchange). Additionally, don't forget to consider depreciation recapture and the fact that any suspended passive losses attributable to the property are freed up in the year of disposition and are fully deductible against your income.

Net Investment Income Tax (NIIT)

An additional 3.8% tax is levied on certain unearned income of higher-income taxpayers. The net investment income tax is levied on the lesser of net investment income or the amount by which modified AGI (MAGI) exceeds certain dollar amounts: $250,000 for married filing jointly and qualifying surviving spouses, $125,000 for married taxpayers filing separate returns, and $200,000 for single and head-of-household filers.

Investment income is: (1) gross income from interest, dividends, annuities, royalties, and rents (other than from a trade or business); (2) other gross income from any business to which the tax applies; and (3) net gain attributable to property that is not attributable to an active trade or business. Investment income does not include distributions from a qualified retirement plan or amounts subject to self-employment tax. This rule applies mostly to passive businesses and trading in financial instruments or commodities.

With this additional tax, the maximum 2025 net capital gains rate of 23.8% applies to taxable income above $600,050 for joint returns or surviving spouse, $300,000 for married filing separate, $566,700 for head of household, or $533,400 for single filers. Strategies to reduce NIIT exposure include exchanging real property through a like-kind exchange to defer recognition of any gain until a future year when MAGI may be lower, or, if a planned sale of your principal residence would result in a gain over the exclusion amounts ($250,000/$500,000 depending on filing status), postponing the sale until after 2025 if your income will be lower in 2026.

Defer Taxes by Investing in Qualified Opportunity Funds (QOFs)

If you invest in Qualified Opportunity Zone property through a Qualified Opportunity Fund (QOF) within 180 days of realizing an eligible gain, you can temporarily defer tax on the amount of eligible gains you invest, and in some situations you can permanently exclude 10% or 15% of the eligible gain you invest. Eligible gains include both capital gains and gains from depreciable property and real estate held for more than one year, but only if the gains: (1) would be recognized for federal income tax purposes before January 1, 2027, and (2) are not from a transaction with a related person. You can defer tax on eligible gain invested in a QOF until the earlier of (1) an “inclusion event” (generally an event that reduces or terminates your qualifying investment in the QOF, or (2) December 31, 2026.

The amount of time you hold the QOF investment determines the tax benefit you receive. When you make an election to defer the eligible gain, the basis in the QOF investment becomes zero. If you hold your investment in the QOF for at least five years, your basis (the amount of your investment) will increase by 10% of the deferred gain. If you hold your investment in the QOF for at least seven years, your basis will increase by an additional 5% of the deferred gain. The 10% and additional 5% basis increases have the effect of excluding a portion of invested eligible gain from federal capital gains tax. If you hold your investment in the QOF for at least 10 years, you may be able to permanently exclude post-acquisition gain resulting from appreciation in the qualifying investment when it is sold or exchanged. The exclusion occurs if you elect to increase the basis of your QOF investment to its fair market value on the date of the sale or exchange.

Qualified Dividends

Qualified dividends (dividends on stock held for a certain length of time) received in 2025 are taxed at rates similar to the favorable capital gains rates. Therefore, qualified dividends on stocks held for more than one year are taxed at a maximum rate of 20% (23.8% if subject to the NIIT). Qualified dividends include dividends received from domestic and certain foreign corporations. Non-qualified dividends are subject to ordinary income rates of up to 40.8% (37% income tax rate plus 3.8% NIIT rate).

Exclusion of Gain Attributable to Certain Small Business Stock

A percentage of the gain on your sales of “small business stock” is excluded from income. The percentage excluded depends on when you acquired the stock and how long you hold it before selling it.

Installment Sales

If you realize gain on the sale of property, you normally can defer recognition under the installment method until payments are received, so long as you receive at least one payment in the year after the sale. Thus, if you expect to sell property at year-end, and it makes economic sense, consider selling the property using the installment method to defer payments (and tax) until next year or later. Using the installment sale method also may defer or reduce exposure to the 3.8% NIIT.

Qualified Equity Grants

You may be able to defer tax on vested qualified stock if you have insufficient cash flow to cover your tax liability. You would do this by making a special election regarding stock attributable to options exercised or restricted stock units settled in 2025 or later, so that no amount will be included in your income for the first tax year your rights in the stock are transferable or not subject to a substantial forfeiture risk. In many cases, a qualified equity grant defers tax until five years after the qualified stock vests.

Energy Tax Credits

Residential Clean Energy Credit

For 2025, a tax credit is available to homeowners and tenants who install certain energy-efficient property on their residence, such as solar equipment, geothermal heat pumps, wind turbines, fuel cells, and battery storage technology with a capacity of at least three kilowatt hours. The credit equals 30% of the cost of qualifying property installed in 2025. Fuel cell property is limited to a combined credit of $1,667 for each half kilowatt of fuel-cell capacity for all residents living in a property. You may need to subtract subsidies, rebates, and other financial incentives from your qualified property expenses if they are considered purchase price adjustments.

The credit is non-refundable, so it is limited to the amount you owe in taxes. However, you can carry any unused credit amount to future years. The residential clean energy credit is available for property installed on or in homes located in the United States.

The residential clean energy credit is available only for improvements to a dwelling that you use as your residence. Fuel cell property expenditures qualify for the credit only if the home is used as your primary residence (where you live most of the year).

Please note that this credit will not be available for expenditures made after December 31, 2025, so you should consider the benefit of making eligible improvements before the end of the year.

Energy Efficient Home Improvement Credit

For 2025, if you make qualified energy-efficient home improvements, you may qualify for a tax credit of up to $3,200 for the year the improvements are installed. The home must be an existing (not new) home in the United States. You cannot claim the credit if you are a landlord (or other property owner who doesn't live in the home).

The energy efficient home improvement credit amount is 30% of certain qualified expenses, including: 

• Qualified energy efficiency improvements such as windows, skylights, exterior doors, and insulation to your primary residence);

• Residential energy property expenses such as energy-efficient heat pumps, central air conditioners, furnaces, and water heaters installed on your primary residence or a second home; and

• Home energy audits.

The maximum 2025 credit is $1,200 for energy property costs and certain energy efficient home improvements, plus $2,000 for qualified heat pumps, biomass stoves, or biomass boilers. However, property-specific limits also apply: 

• $250 per exterior door, up to $500 total;

• Up to $600 for exterior windows and skylights;

• Up to $600 each for central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane, oil furnaces and hot water boilers; and biomass stoves or boilers;

• Up to $600 per item for the cost of electrical components needed to support residential energy property, including panelboards, sub-panelboards, branch circuits, and feeders, which also qualify for the credit if they meet the National Electric Code and have a capacity of 200 amps or more;

• Up to $150 for home energy audits.

You may need to subtract subsidies, rebates, or other financial incentives from your qualified property expenses if they are considered purchase price adjustments. The energy-efficient home improvement credit is non-refundable, so it is limited to the amount you owe in taxes, and you cannot apply any excess credit to future tax years.

You can claim this credit for eligible improvements made through December 31, 2025.

New Clean Vehicle Credit

A clean vehicle credit may be available for plug-in electric or fuel cell motor vehicles acquired before October 1, 2025. The vehicle must be placed in service to claim the credit; the vehicle can be placed in service after October 1, 2025, as long as it is acquired before then. A $7,500 maximum per-vehicle credit is available to individuals and their businesses. Qualifying vehicles include passenger cars, vans, sport utility vehicles, and pickup trucks.

A vehicle qualifies for the new clean vehicle credit if: 

• Purchased new;

• For your own use, not for resale;

• The seller reports required information to you and the IRS at the time of sale;

• Made by a qualified manufacturer;

• It has a gross vehicle weight rating of less than 14,000 pounds;

• It has a battery capacity of at least seven kilowatt hours;

• Final assembly occurs in North America; and

• Suggested retail price (MSRP) is less than or equal to $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicles.

Income limits apply: MAGI cannot exceed $300,000 for married couples filing jointly, $225,000 for heads of households, and $150,000 for all other filers.

You can use the lesser of your MAGI from the year you take delivery of the vehicle or the year before. If your MAGI is below the threshold in either one of the two years, you can claim the credit. The credit is non-refundable, so it is limited to the amount you owe in taxes, and you cannot apply any excess credit to future tax years.

For vehicles placed in service from January 1 to April 17, 2023, the clean vehicle credit equals: 

• $2,500 base amount;

• + $417 if at least seven kilowatt hours of battery capacity;

• + $417 for each kilowatt hour of battery capacity beyond five kilowatt hours;

• up to $7,500 total. 

The battery capacity must be at least seven kilowatt hours to qualify for the credit. Thus, the minimum credit is $3,751 ($2,500 + ($417 × 3)), the credit amount for a vehicle with the minimum seven kilowatt hours of battery capacity.

Vehicles placed in service April 18, 2023, and later must meet all the same criteria listed above and also must meet critical minerals and battery components requirements. The credit amount for vehicles placed in service on April 18, 2023, and later is up to: 

• $3,750 if the vehicle meets the critical minerals requirement only;

• $3,750 if the vehicle meets the battery components requirement only;

• $7,500 if the vehicle meets both requirements.

Used Clean Vehicle Credit

Qualified used electric or fuel cell vehicles purchased from a licensed dealer for $25,000 or less before October 1, 2025, may be eligible for the previously-owned clean vehicle tax credit. The credit equals 30% of the sale price, up to a maximum credit of $4,000. The credit is non-refundable, so it is limited to the amount you owe in taxes, and you cannot apply any excess credit to future tax years.

To qualify, you must:

• Be an individual who bought the vehicle for use and not for resale;

• Not be the original owner;

• Not be claimed as a dependent on another person's tax return; and

• Not have claimed another used clean vehicle credit in the three years before the purchase date. 

MAGI may not exceed $150,000 for married filing jointly or a surviving spouse, $112,500 for heads of households, $75,000 for all other filers. You can use the lesser of MAGI from the year you take delivery of the vehicle or the year before. If your income is below the threshold for either one of the two years, you can claim the credit.

Vehicles must meet all the following requirements: 

• Have a sale price of no more than $25,000;

• Have a model year at least two years earlier than the calendar year of purchase;

• Not have already been transferred to a qualified buyer after August 16, 2022;

• Have a gross vehicle weight rating of less than 14,000 pounds;

• Be an eligible fuel-cell or plug-in electric vehicle with a battery capacity of least seven kilowatt hours;

• Be for use primarily in the United States; and

• The dealer must report required information to you and the IRS at the time of sale.

Family and Education Tax Incentives

Child Tax Credit

The OBBBA increased the 2025 Child Tax Credit (CTC) to $2,200 per qualifying child under the age of 17 at the end of 2025. The refundable portion is unchanged at $1,700 per qualifying child. The credit phases out for taxpayers with AGI above $400,000 for married filing joint returns and $200,000 for all other returns.

The OBBBA added stricter SSN requirements for 2025. To claim the credit, in addition to the qualifying child's SSN, a valid, work-eligible parental SSN is required. For married couples filing jointly, at least one spouse must meet the requirement.

Other Dependent Credit

A $500 non-refundable credit for dependents other than qualifying children (e.g., a child over the age of 16 or an elderly parent living with you who qualifies as a dependent) also is available in 2025. There is no age limit, but the dependency test must be satisfied. The credit phases out for higher-income taxpayers.

Credit for Adoption Expenses

The OBBBA increased the 2025 adoption credit to $17,280 per child for adoption-related expenses and made up to $5,000 of the credit refundable. Any part of the non-refundable credit amount may be carried forward for up to five years to offset future tax liabilities. Families who finalize the adoption of a special-needs child and meet eligibility requirements can claim the full credit of $17,280 regardless of whether expenses were less than $17,280 or they had no expenses. The credit begins to phase out for taxpayers whose income exceeds $259,190 and is completely phased out for taxpayers whose income is $299,190 or more.

Household and Dependent Care Tax Credit

You may be able to claim a credit for day care, nursery school, before- and after-school care, summer camps, or other care expenses for a qualifying individual to enable you (or your spouse, if filing jointly) to work or actively look for work.

Qualifying individuals include: 

• Dependent qualifying child who was younger than 13 when the care was provided;

• Spouse who was physically or mentally incapable of self-care and lived with you for more than half of the year;

• Any other dependent claimed on your tax return, if that person was physically or mentally incapable of self-care and lived with you at least half the year.

The credit ranges between 20%–35% of eligible expenses, up to a maximum of $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. The maximum credit for 2025 is $1,050 (35% of $3,000) or $2,100 (35% of $6,000), for taxpayers with an AGI of $15,000 or less. The 35% credit is phased out beginning at $15,000 to a minimum credit of 20% for AGI of $43,000 or more. The credit is non-refundable.

Noncustodial parents should review the rules for divorced or separated parents or parents living apart in Publication 503, because a child may be treated as a qualifying individual for the custodial parent even if the noncustodial parent is entitled to claim the child as a dependent.

Health Care Flexible Spending Accounts (FSAs)

For 2025, you can contribute a maximum of $3,300 in salary reduction contributions to a health FSA, and carryover a maximum of $660 to 2026. Typically, employers require the following year's election to be set before the end of the year.

Health Savings Accounts (HSAs)

HSAs are trust or custodial accounts exclusively created for the benefit of the account holder, spouse, and dependents, which are subject to rules similar those applicable to individual retirement arrangements (IRAs). For 2025, the maximum contribution is $4,300 for individuals and $8,550 for families, with an additional catch-up contribution of $1,000 allowed for those aged 55 and older. HSA contributions are pre-tax.

529 Qualified Tuition Plans

A 529 qualified tuition plan allows you to save for future education expenses in a tax-advantaged savings plan. These plans generally are available in the form of a prepaid tuition plan that allows you to lock in future tuition at current cost or a more traditional investment account that grows tax-deferred and whose distributions are used to pay qualified post-secondary education expenses such as tuition, fees, books, supplies, testing, and room and board, which are income-tax-free for federal and state purposes. Many states allow for a deduction or tax credit per beneficiary for contributions to that state's 529 plan. Plan distributions also may be made tax-free for elementary and secondary tuition of up to $10,000 per year per student and also may be used to pay up to $10,000 of student loans per beneficiary.

For 2025, the annual gift tax exclusion is $19,000 for contributions to a 529 plan ($38,000 for married filing jointly). Under a special rule, you can also contribute an amount equal to five years' worth of annual gift tax exclusions ($95,000 per beneficiary, $190,000 if gift-splitting with a spouse), but this requires filing a gift tax return. You cannot make additional contributions for the next five years and may or may not owe taxes, depending on your situation.

American Opportunity Tax Credit for Education (AOTC)

The American Opportunity Tax Credit (AOTC) is available for qualified tuition and fees paid on behalf of a student (which could be you, your spouse, or a dependent) who is enrolled on at least a half-time basis. The maximum credit is $2,500 (100% of the first $2,000, plus 25% of the next $2,000). The credit is available for the first four years of the student's post-secondary education. The AOTC phases out at MAGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers. Up to 40% of the credit is refundable, which means that you can receive up to $1,000 even if no tax is owed.

One way to take advantage of the AOTC is to prepay Spring 2026 tuition by the end of 2025. In addition, if it is known what books the student will need for the Spring 2026 semester, those can be bought in 2025 and the costs would qualify for the credit for 2025.

Lifetime Learning Credit for Education

The Lifetime Learning Credit (LLC) is available for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. The LLC is a non-refundable credit.

For 2025, the maximum credit is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as the student is taking post-secondary classes to acquire or improve job skills. As with the AOTC, eligible students include you, your spouse, or a dependent. For 2025, the LLC is phased out ratably for taxpayers with MAGI between $80,000 and $90,000 ($160,000 and $180,000 for joint returns). If your MAGI is $90,000 or more ($180,000 or more for joint returns), you cannot claim the credit.

Coverdell Education Savings Accounts

The aggregate annual contribution limit for a Coverdell education savings account is $2,000 per designated account beneficiary. For 2025, the limit is phased out for individual contributors with MAGI between $95,000 and $110,000 and joint filers with MAGI between $190,000 and $220,000. Contributions are non-deductible, but the earnings grow tax-free. Coverdell account holdings can be distributed tax-free if used for qualified higher-education expenses (tuition, fees, books, supplies, equipment required for enrollment or attendance, and expenses for special-needs services) and/or qualified elementary- and secondary-education expenses (tuition, fees, academic tutoring, special-needs services, books, supplies, computer equipment, room and board, uniforms, transportation, and supplementary items or services).

Student Loan Interest Deduction

You may be eligible for a $2,500 above-the-line deduction for interest paid on qualified education loan. The deduction begins to phase out for higher-earning taxpayers with MAGI exceeding $85,000 ($170,000 for joint returns) and is completely phased out for taxpayers with MAGI of $100,000 or more ($200,000 or more for joint returns).

Kiddie Tax

For 2025, your child's unearned income (e.g., investment income and capital gains) above $2,700 generally is taxed at your marginal tax rate, and your child's unearned income above $1,350 but not more than $2,700 is taxed at your child's tax rate. The first $1,350 of your child's unearned income is tax-free (covered by the standard deduction). If your child's only income is from passive sources (dividends, interest) and is less than $13,500, you can elect to include your child's income on your return using Form 8814. If your child's income exceeds $13,500, the child must file a separate return using Form 8615. Including your child's income on your return will increase your AGI and taxable income, thus resulting in a higher tax and possible reductions in credits and other amounts that are tied to AGI.

The kiddie tax applies to: (1) children under 18 whose unearned income exceeds the threshold, or (2) children between the ages of 19 and 23 who are full-time students and the income is less than half their total support.

Achieving a Better Life Experience (ABLE) Accounts

These savings accounts are meant to assist individuals with disabilities and their families. For 2025, the annual contribution limit is $19,000 (tied to the annual gift tax exclusion). Also for 2025, eligible working beneficiaries may make additional contributions up to the lesser of their compensation or the federal poverty level ($15,650). Combined, the maximum possible contribution in 2025 is $34,650. Distributions are tax-free if used to pay the beneficiary's qualified disability expenses.

Annual Gift Tax Exclusion

For 2025, the annual gift tax exclusion is increased to $19,000 per donee without reducing the estate tax and lifetime gift tax exclusion amount. The number of donees to whom you may make such gifts is unlimited. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donees (family and non-family). For example, if you make separate $19,000 gifts to 10 donees, you may exclude $190,000 from gift tax. In addition, because spouses may combine their exclusions in a single gift from either spouse, married donors may double the exclusion amount to $38,000 per donee.

For 2025, the first $190,000 of gifts to a noncitizen spouse (other than gifts of future interests in property) is also excluded from gift tax. You may not carry over your annual gift tax exclusion amount to the next calendar year. Qualifying tuition payments and medical payments do not count against this limit.

Trump Accounts

Something to think about for next year if your family includes a newborn, the OBBBA created “Trump accounts” for the benefit of U.S. citizens born after December 31, 2024. These accounts generally will work like non-Roth IRAs. You can begin to make annual contributions of up to $5,000 on July 4, 2026. Your employer also can contribute up to $2,500 annually. The government will make an initial $1,000 contribution for each account.

Retirement Planning

Maximize Retirement Savings

If you are not contributing the maximum amount permitted to your §401(k) account for 2025, you still have time to increase contributions to lower your AGI and take advantage of some of the tax breaks described herein. Maximizing pre-tax retirement contributions is a good tax-saving move.

Traditional IRA

If you're not an active participant in an employer retirement plan you may be able to make deductible contributions to an IRA. The deadline for 2025 contributions is April 15, 2026. The annual deductible contribution limit for an IRA for 2025 is $7,000. You can make a $1,000 “catch-up” contribution if you're age 50 or older by the close of 2025, making your total limit $8,000. If you're an active participant in an employer pension plan you can still make deductible contributions to an IRA, but your contributions will be limited in amount depending on your AGI.

For 2025, the AGI phase-out range for deductibility of IRA contributions is between $79,000 and $89,000 of MAGI for single persons (including heads of households), and between $126,000 and $146,000 of MAGI for joint filers. Above these ranges, no deduction is allowed. If you're a married taxpayer filing a separate return you may not deduct IRA contributions if your MAGI is $10,000 or more. (That's not a typo. It's a very low limit.) Note that you're not considered an “active participant” in an employer plan simply because your spouse is an active participant for part of a plan year. You may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint MAGI is $236,000 to $246,000 ($0 − $10,000 if married filing separately) for 2025. Above this range, no deduction is allowed.

IRA Rollovers

For 2025, you may make only one IRA-to-IRA rollover. (Direct trustee-to-trustee rollovers are not affected.) A second attempted rollover will be treated as a withdrawal and taxed at regular rates, plus a possible 10% early withdrawal penalty.

Spousal IRA

If you file a joint return and have less compensation than your spouse, your IRA contribution is limited to the lesser of (1) $7,000 for 2025 plus age 50+ catch-up contributions ($1,000 for 2025), or (2) the total compensation of both spouses reduced by your spouse's IRA contributions (traditional and Roth).

Roth IRA

This type of IRA allows you to make non-deductible contributions of up to $7,000 ($8,000 if making a $1,000 eligible catch-up contribution) for 2025. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after contribution and the individual has reached age 59 1/2. Distributions may be made earlier due to disability or death. The maximum contribution is phased out in 2025 at an AGI from $236,000 to $246,000 for joint filers, $150,000 to $165,000 for single taxpayers (including heads of households), and between $0 and $10,000 for a married taxpayer filing separately who lived with a spouse during the year. You must establish and fund your Roth IRA by April 15, 2026, for the contribution to be considered a 2025 contribution.

“Backdoor” Roth IRA

If your income is too high to make a Roth IRA contribution and you do not have a traditional IRA, you can establish a traditional IRA and make a non-deductible contribution. You can then convert the traditional IRA to a Roth IRA (see directly below), but you will have to pay income tax on a percentage of the converted amount. The taxable percentage of the converted amount equals the percentage of the funds in all your traditional IRAs, SEPs, and SIMPLE plans combined consisting of pre-tax dollars.

Roth IRA Conversions

Funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity, or §457 government plan may be rolled over into a Roth IRA. No penalties will apply if all the requirements for such a transfer are satisfied.

§401K Plans

The §401(k) elective deferral limit is $23,500 for 2025. If your employer's §401(k) plan allows for catch-up contributions for 2025 and you reach age 50 by December 31, 2025, you may contribute an additional $7,500 for a total maximum 2025 contribution of $31,000 ($23,500 in regular contributions plus $7,500 in age 50+ “catch-up” contributions). Some plans allow taxpayers age 60 to 63 to make catch-up contributions of $11,250 instead of $7,500.

A sole proprietorship or single-member LLC that establishes a §401(k) plan for 2025 has until April 15, 2026, to make employee contributions for 2025.

SIMPLE Plan Contributions

The SIMPLE plan deferral limit is $16,500 for 2025. If your SIMPLE plan allows for catch-up contributions for 2025 and you will be 50 years old by December 31, 2025, an additional $3,500 may be contributed. Taxpayers age 60-63 can make an additional catch-up contribution of $5,250.

Catch-Up Contributions for Other Plans

If you will be 50 years old by December 31, 2025, you can contribute an additional $7,500 to a §403(b) plan, SEP, or eligible §457 government plan ($11,250 if you're age 60-63).

IRA Required Minimum Distributions (RMDs)

If you turned 73 in 2025, you won't have to take a RMD until 2026 and the first must be taken by April 1, 2026. If a portion of your retirement account includes an annuity, you may be able to decrease the amount of your required distribution by aggregating distributions from the IRA and the annuity.

IRA Donations to Charity

If you are 70½, you can make direct contributions from your IRA to charity of up to $108,000 during 2025, but you can't claim a charitable contribution deduction. Conversely, the amounts are not included in your taxable income and can be used to satisfy your RMD. You also may elect a one-time contribution from your IRA of up to $54,000 to charity through a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust funded only by qualified charitable distributions.

Tax Breaks for Small-Business Owners and Self-Employed Individuals

There are a variety of tax provisions that are available to you as a self-employed individual or if you are a small-business owner of an entity such as a partnership, LLC, single-member LLC, or an S corporation.

Qualified Business Income Deduction (QBI Deduction)

Individual taxpayers with qualified business income from a pass-through entity (partnership, S corporation, LLC, or single-member LLC) or a sole proprietorship may be entitled to a 2025 deduction equal to the lesser of the deductible amount of the QBI (generally 20% subject to the W-2 wage basis limit) or 20% of net taxable income from the business. Deductions also may be allowed for 20% of qualified REIT dividends and qualified publicly traded partnership income. Special rules apply for these additional items. The deduction reduces taxable income and is available even if you don't itemize deductions. (The QBI deduction does not impact the calculation of the self-employment tax.)

For 2025, if your taxable income does not exceed $394,600 (married filing jointly) or $197,300 (all other taxpayers), your deduction is generally the lesser of 20% of QBI or 20% of taxable income. If your taxable income exceeds the threshold amount, your deduction is subject to a wage-basis limit that is phased in ratably, only a portion of your income from a specified trade or business is eligible, the W-2 wage limitation applies, and specified service trades or businesses are excluded. However, if your taxable income exceeds the threshold amount by $100,000 or more (married filing jointly) or by $50,000 or more (other filers), the wage-basis limit applies in full and income from specified trades or businesses is not eligible for the QBI deduction.

Calculating the QBI deduction is a fact-intensive inquiry. If you claim the deduction and understate the amount of tax required to be shown on the return by 5% or more, you may be subject to up to a 40% substantial understatement of tax penalty.

Home Office Deduction

If you're a self-employed individual or a small-business owner (but not an employee), your expenses attributable to using your home as a business office are deductible if your home office is used regularly and exclusively: (1) as your principal place of business for any trade or business; (2) as a place where you regularly meet or deal with patients, clients, or customers in the normal course of business; or (3) in the case of a separate structure not attached to your residence, in connection with a trade or business.

Depreciation and Section 179 Expense Election

If you're in business and purchase equipment, you may depreciate such equipment or make a §179 election, which allows you to expense (i.e., currently deduct) otherwise depreciable business property (but not investment property). For 2025, the allowable deduction is $2,500,000 (with a phase-out beginning at $4,000,000).

Bonus Depreciation

Business or investment property placed in service after January 19, 2025, including certain used property, may be eligible for a 100% bonus depreciation deduction (separate from §179 expensing). The deduction is 60% for property placed in service before that date. You may not take a bonus depreciation deduction for expenses you deduct under §179.

NOL Carryback/Carryforward Period

Net operating losses (NOLs) arising in 2025 may not be carried back but can be carried forward.

Capitalization vs. Expensing for Materials and Supplies and Repairs

You can deduct certain materials and supplies that have an acquisition or production cost of $200 or less. For repairs to be deductible, among other requirements, the unit of property must cost $5,000 or less per invoice or item substantiated by the invoice if you have applicable financial statements, and $2,500 or less per invoice if you don't have applicable financial statements.

Self-Employed Health Insurance Premiums

If you are self-employed, you may claim as an above-the-line deduction 100% of the amount you paid during the tax year for insurance that constitutes medical care for yourself, your spouse, and your dependents, without having to worry about exceeding the general 7.5%-of-AGI floor for medical expense deductions.

SEP IRA Contributions

For 2025, if you are self-employed, you generally can make a SEP contribution up to the lesser of 25% of your compensation or $70,000. The SEP contribution is an above-the-line deduction that reduces AGI (your taxable income before other adjustments). Note that the self-employment tax is calculated before SEP contributions are calculated. You must establish your SEP IRA by your tax return due date (plus any extensions) for the tax year the qualifying contribution is made. Thus, you can wait until after the close of 2025 to establish and determine your SEP contribution for 2025.

Employing Family Members

Wages for the services of one spouse who works for the other spouse are subject to income tax withholding and Social Security and Medicare taxes, but not to the Federal Unemployment Tax Act (FUTA). You can hire your children to work in your business as well. Payments are subject to income tax withholding, regardless of the child's age. However, payments for the services of a child under age 18 are not subject to Social Security and Medicare taxes if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. In addition, payments to a child under age 21 are not subject to FUTA.

Payments for the services of a child are subject to income tax withholding as well as Social Security, Medicare, and FUTA taxes if they work for: (1) a corporation, even if it's controlled by the child's parent, or (2) a partnership, even if the child's parent is a partner, unless each partner is a parent of the child. Wages that you pay to a parent are subject to income tax withholding and Social Security and Medicare taxes but are not subject to FUTA tax.

In addition to being able to deduct wages paid to a family member as a business expense, a key tax benefit is that any child, regardless of age, can contribute to an IRA provided he/she has earned income. Your children also can contribute to a Roth IRA. If your child is a minor (under age 18 in most states; under age 19 or 21 in others), you will need to open a custodial account.

Government-Provided Relief Programs

Forgiveness or cancellation of all or part of Paycheck Protection Program (PPP) loans and other types of loans provided to businesses during the pandemic will not be treated as income for tax purposes. In addition, deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and the tax basis and other attributes of the borrower's assets will not be reduced due to the loan forgiveness. For certain student loans, forgiveness or cancellation of all or part of such loans will not be treated as income for federal tax purposes. However, forgiveness of cancellation of all or part of such loans may be treated as income for state tax purposes, depending on your specific state's rules.

Reporting Reminders

Form 1040

You must file your 2025 income tax return on or before April 15, 2026, and an automatic six-month extension is available until October 15, 2026.

FinCEN Form 114

If you hold any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time during the 2025 calendar year, you must electronically file a Report of Foreign Bank and Financial Accounts (FBAR). The 2025 FBAR due date for the is the same as Form 1040/ 1040-SR (April 15, 2026), with an automatic six-month extension to October 15, 2026.

Penalties

A host of penalties may be assessed if you file returns late, fail to file returns (including information returns), fail to pay tax, or file an inaccurate or fraudulent return. Many penalties are subject to inflation adjustments.

Cryptocurrency/Digital Asset Transactions

You must report certain transactions involving cryptocurrency and other digital assets on the appropriate income line or schedule, and also must answer a question on page 1 of the Form 1040/ 1040-SR.

Information About this Publication

This information was sourced from Bloomberg Industry Group, Inc.  For more information or to speak with an expert regarding your tax compliance needs, please contact Christopher Cox at ccox@caroprese.com or via telephone at 973-475-8090.