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Smart Tax Strategies to Keep More of Your Income in 2025
As we enter the new year, don’t wait to implement tax strategies that could improve your financial situation. For investors, smart tax strategies can mean keeping more of what you earn and maximizing the value of your portfolio. Here are some key approaches to consider as you plan for 2025:
1. Maximize Tax-Advantaged Accounts*
Contributing to tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs) can reduce your taxable income. For 2025, the 401(k) contribution limit is $23,500 for those under 50, with an additional $7,500 catch-up contribution for those 50 and older. A new provision allows individuals aged 60 to 63 to make an enhanced catch-up contribution of $3,750 in addition to the traditional catch-up contribution, providing a significant opportunity to boost retirement savings during those critical pre-retirement years.
Traditional IRAs also allow for tax-deferred growth, and contributions may be deductible depending on your income and retirement plan coverage.
Roth accounts, while funded with after-tax dollars, offer tax-free withdrawals in retirement—a great option if you expect to be in a higher tax bracket later.
2. Utilize Qualified Charitable Distributions (QCDs)**
If you’re 70½ or older, a Qualified Charitable Distribution (QCD) allows you to donate up to $108,000 directly from your IRA to a qualified charity. This strategy not only satisfies your Required Minimum Distribution (RMD) but also reduces your taxable income. By directing funds straight to the charity, you avoid having the distribution counted as part of your Adjusted Gross Income (AGI), which can help minimize taxes on Social Security benefits or Medicare premiums. This approach is particularly advantageous for retirees who wish to support charitable causes while managing their tax liabilities efficiently.
3. Gift Appreciated Securities
Instead of donating cash or selling investments to give proceeds, consider gifting appreciated stocks or mutual fund shares directly to family members or charities. By gifting to family members in lower tax brackets, they may pay significantly lower taxes on the capital gains, or possibly none at all, depending on their income level. For charitable donations, you can deduct the fair market value of the securities while avoiding the capital gains tax you’d incur if you sold them. This dual benefit maximizes the impact of your gift while offering meaningful tax savings. It’s a smart way to reduce the tax burden on highly appreciated assets.
4. Be Strategic with Municipal Bonds
Municipal bonds, often referred to as “munis,” offer a reliable source of tax-free interest income at the federal level. If you purchase bonds issued by your home state, you may also avoid state and local taxes. For high-income earners, the tax-equivalent yield of municipal bonds can be more attractive than taxable bonds, especially if you’re in the highest federal income tax brackets. Additionally, municipal bonds are generally considered lower-risk investments, providing steady income without increasing your taxable income—a win-win for those seeking both stability and tax efficiency. Whether you should own taxable or tax-free bonds, however, is unique to each individual and should be analyzed as such.
5. Stay Informed on Tax Law Changes*
Tax laws are dynamic, and staying informed helps ensures you’re prepared to adapt your strategy to new opportunities or avoid pitfalls. The individual tax cuts introduced under the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025 unless new legislation extends them. This includes potential increases in individual income tax rates, a reduction in the standard deduction, and a lower threshold for estate tax exemptions, which may revert to pre-2018 levels—around $7 million per individual instead of the current $14 million. By monitoring legislation, you can adjust your portfolio and tax strategies proactively.
Take Action Now
The key to effective tax planning is proactive management. By leveraging these strategies, you may be able to reduce your tax bill and keep more of your income in 2025. Don’t wait until the end of the year to start planning! Schedule a consultation with one of our experienced wealth managers today to discuss personalized strategies that align with your financial goals.
Sources:
*https://www.morningstar.com/personal-finance/your-tax-fact-sheet-calendar
Confluence Financial Partners does not provide tax advice. You should consult your own tax advisors before engaging in any transaction.
