As the end of the year approaches, it’s an ideal time to review your financial situation and implement tax strategies that can reduce your tax liability. Thoughtful year-end tax planning can help you keep more of your hard-earned money and avoid surprises when you file your tax return. This article covers effective year-end tax strategies you can use to save money and optimize your finances.
Contributing the maximum allowed to tax-advantaged retirement accounts like 401(k)s and IRAs is one of the most effective ways to reduce taxable income.
- 401(k) and 403(b) plans: For 2025, the contribution limit is $23,000 if you’re under 50, and $30,000 if you’re 50 or older (including catch-up contributions). Contributions reduce your taxable income for the year.
- Traditional IRA: Contributions may be tax-deductible depending on your income and participation in other retirement plans.
- Health Savings Account (HSA): If you have a high-deductible health plan, contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
Maxing out these accounts before December 31 can significantly lower your taxable income and boost your retirement savings.
Tax-loss harvesting is the practice of selling investments at a loss to offset gains realized from other investments during the year.
- Why it helps: Capital gains are taxable, but if you have capital losses, you can use them to reduce taxable gains. If losses exceed gains, you can deduct up to $3,000 of losses against other income and carry over excess losses to future years.
- What to watch: Be mindful of the “wash-sale” rule, which disallows a loss deduction if you buy the same or substantially identical security within 30 days before or after the sale.
This strategy can help you lower your capital gains tax bill while rebalancing your portfolio.
Donating to qualified charities before year-end provides a tax deduction if you itemize deductions.
- Donate appreciated assets: Donating stocks or other appreciated assets can give you a double tax benefit — you avoid capital gains taxes on the appreciated value and deduct the full fair market value.
- Bunch contributions: If your itemized deductions are close to the standard deduction threshold, consider “bunching” multiple years’ worth of donations into one year to maximize deductions.
- Keep documentation: Always keep receipts or acknowledgment letters for charitable contributions to substantiate your deductions.
Adjusting the timing of income and deductible expenses can impact your tax liability.
- Accelerate expenses: Pay deductible expenses such as medical bills, property taxes, or mortgage interest before year-end to increase deductions in the current tax year.
- Defer income: If you expect to be in a lower tax bracket next year, defer income like bonuses or freelance payments until the next tax year.
- Consider your tax bracket: Timing strategies depend on your current and expected future tax brackets. Consult a tax professional if you’re unsure.
If you have an FSA through your employer, check your account balance and use any remaining funds before the deadline.
- Use it or lose it: FSAs typically have a use-it-or-lose-it policy, so spending leftover money on eligible medical expenses before the year ends prevents losing those funds.
- Plan purchases: Stock up on necessary medical supplies, prescriptions, or scheduled appointments that qualify for FSA reimbursement.
Tax credits directly reduce the amount of tax owed, so ensure you’re taking advantage of all eligible credits.
- Child tax credit: Available for qualifying children under age 17.
- Earned Income Tax Credit (EITC): For low to moderate-income workers.
- Energy-efficient home credits: For installing solar panels or other energy-saving improvements.
- Education credits: Such as the American Opportunity Tax Credit or Lifetime Learning Credit.
Review eligibility requirements carefully and gather proper documentation.
If you’re over 72 and have traditional IRAs or 401(k)s, you must take Required Minimum Distributions each year.
- Avoid penalties: Missing RMD deadlines can result in hefty penalties.
- Charitable donations: Consider a Qualified Charitable Distribution (QCD) from your IRA if you plan to donate to charity. This distribution counts toward your RMD and is excluded from taxable income.
Year-end tax planning is a proactive way to reduce your tax burden and improve your financial outlook. By maximizing retirement contributions, harvesting tax losses, managing charitable donations, adjusting income and expenses, using FSAs, claiming credits, and handling RMDs properly, you can save money and set yourself up for a smoother tax season.
Start early to implement these strategies before December 31, and consider consulting a tax professional for personalized advice tailored to your situation. Smart year-end tax planning pays off by boosting your savings and minimizing what you owe to the IRS.