Strategies for Minimizing Taxable Income This Year, resulting in a decreased 2025 tax obligation
With the 2025 tax year fast approaching, it's essential for taxpayers to consider potential changes due to the scheduled sunset of many Tax Cuts and Jobs Act (TCJA) provisions at the end of 2025. Here are some key strategies and considerations for reducing taxable income:
1. **Scenario Modeling and Professional Planning:** Given the uncertainty around which TCJA provisions will expire, extend, or be modified in 2026, engaging a professional to model different scenarios is crucial. For instance, the SALT deduction cap is currently $10,000, but proposals aim either to raise it or impose an income limit, impacting taxpayers in high-tax states.
2. **Optimize Itemized vs. Standard Deductions:** If TCJA provisions expire, the standard deduction could be cut roughly in half in 2026, making it more beneficial to consider itemising deductions in 2025 despite the SALT cap. Taxpayers should evaluate which deduction method yields the greatest tax benefit before year-end.
3. **Maximise Retirement Contributions:** Contributing the maximum allowed to tax-advantaged retirement accounts such as 401(k)s, IRAs, and cash balance plans can substantially reduce taxable income. Cash balance plans, in particular, allow large tax-deferred contributions for high-income earners, lowering current taxable income while building retirement wealth.
4. **Utilise Health Savings Accounts (HSAs):** Contributions to HSAs are tax-deductible and can reduce taxable income. HSAs also grow tax-free and can be used for qualified medical expenses, offering triple tax benefits.
5. **Strategic Charitable Giving:** Donations to charitable organisations can provide itemised deduction benefits. Strategies like bunching charitable contributions into one tax year may increase deduction benefits, especially if the standard deduction threshold makes itemising less attractive otherwise.
6. **Real Estate and Other Investments:** Real estate investments provide opportunities for depreciation deductions, which reduce taxable income. Other tax-advantaged investments and tax-efficient education funding strategies also contribute to lowering taxable income.
7. **Estate and State Tax Planning:** With the estate tax exemption expected to increase in 2025, estate planning can reduce future tax liabilities. Additionally, state tax planning to address SALT deduction caps and other state-specific tax rules can be important.
8. **Mid-Year Tax Checkup:** Conduct a tax checkup by reviewing withholding, estimated tax payments, and any life changes impacting taxes. Adjust retirement contributions or estimated payments mid-year to optimise tax outcomes before filing.
For high earners, it's advisable to explore additional strategies such as:
- Making catch-up contributions to retirement accounts and HSAs if you're age 50 or older. - Contributing to a solo 401(k) plan or SEP IRA if you're self-employed to lower your taxable income. - Utilising a flexible spending account (FSA) to pay for qualified medical expenses and dependent care with tax-free contributions from your salary. - Withdrawing money from a 401(k) before age 59 1/2 can result in a 10 percent penalty, in addition to regular income taxes.
In summary, for 2025 tax planning to reduce taxable income, taxpayers should engage in detailed scenario modeling, maximise retirement and HSA contributions, explore itemising deductions vs. taking standard deductions, employ charitable giving and real estate depreciation strategies, stay informed of evolving SALT cap rules and estate tax exemptions, conduct mid-year tax reviews, and consider professional tax planners to navigate these complexities and tailor strategies to individual circumstances.
- To optimize personal-finance management, high-earning taxpayers may find it beneficial to consider additional strategies beyond the general tactics outlined, such as making catch-up contributions to retirement accounts or HSAs if they're age 50 or older.
- In the realm of personal-finance, self-employed taxpayers might explore utilizing a solo 401(k) plan or SEP IRA as a means to lower their taxable income, which is a crucial aspect of tax planning for the 2025 tax year.
