2025 Year-End Tax Planning Guide

Introduction

2025 marks a pivotal year for year-end tax planning. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made several Tax Cuts and Jobs Act (TCJA) individual provisions permanent and introduced a slate of new deductions and credits. As we quickly approach year-end, now is the time to ensure your current tax-planning strategy aligns with the latest updates to personal and business taxes to potentially lower taxable income, maximize charitable deductions, optimize efficient wealth transfer, and optimize tax strategies for the future.

Year-End Planning Calendar

Checklist: Key Tax Planning Strategies to Complete by December 31, 2025

• Run updated 2025/2026 multi-year projections incorporating OBBBA
• Maximize tax-advantaged retirement & savings accounts
• Time income and compensation based on tax bracket projections
• Optimize deductions & lock in charitable strategy
• Manage capital gains leveraging strategic investments
• Rebalance portfolios with asset location in mind
• Finalize annual gifting and review estate plan goals

Core Year-End Planning Strategies

1. Maximize Tax-Advantaged Retirement & Savings Accounts

Pre-tax contributions to a traditional IRA or an employer-sponsored traditional retirement plan allow you to reduce current year taxable income. Contributions and investment gains are tax-deferred and taxed as ordinary income when withdrawn during retirement.

Roth IRAs and employer-sponsored Roth retirement plans are funded with after-tax dollars meaning they cannot be deducted from taxable income. However, they offer tax-free growth and withdrawals during retirement years. What’s more, required minimum distribution rules don’t apply to Roth IRAs enabling greater flexibility in retirement.

• The 2025 contribution limit for a traditional IRA or Roth IRA is $7,000. Those age 50 and older can make a “catch-up” contribution of $1,000 in 2025, for a total of $8,000.
• The 2025 contribution limit for an employer-sponsored retirement plan like a 401(k) or 403(b) is $23,500. Those age 50 and older can make a “catch-up” contribution of $7,500, for a total of $31,000. Combined with employer contributions and non-deductible after-tax contributions, the limit reaches $70,000 ($77,500 with catch-up contributions)¹.

Unlike 401(k) and 403(b) contributions, which must be made at the end of each plan year, you can contribute to your IRA until next year’s April tax filing deadline. There is no income limit for those who can contribute to a traditional IRA, unlike with a Roth IRA. However, your income (as well as your spouse’s) affects the deductibility of your traditional IRA contributions from taxable income. If you cannot deduct any of your traditional IRA contributions, the money invested still benefits from compounding by growing tax-deferred until it is withdrawn in retirement.

We optimize your tax advantages.

One of the most critical parts of your plan is maxing out your tax-advantaged accounts. Playbook finds your eligible accounts and works them into your plan.

What are tax-advantaged accounts? Accounts with special tax benefits so you can pay less in taxes. Think 401(k), Traditional IRA, Roth IRA, HSA etc.

Backdoor Roth IRA

If you’ve been thinking about converting a portion or all of your traditional IRA to a Roth IRA or your income exceeds the Roth IRA income limits, this may be an opportune time to consider a Backdoor Roth IRA. This strategy involves making non-deductible contributions to a traditional IRA and then converting those funds into a Roth IRA. The conversion is a taxable event, with income taxes due on any pre-tax contributions and investment earnings up to the time of conversion. It’s a good idea to pay the tax due on the conversion from sources other than your IRA to keep your retirement assets invested and working for you. If you already have money in a traditional IRA account, careful planning is required as the “pro rata” rule will apply, potentially creating unintended tax consequences.

Mega Backdoor Roth IRA

Taking the backdoor Roth IRA further, a mega backdoor Roth IRA is a more advanced strategy that specifically applies to employer-sponsored 401(k) plans. This strategy involves making after-tax contributions to the plan and subsequently converting those funds into a Roth 401(k) or Roth IRA. Mega backdoor Roth IRA conversions allow employees to contribute beyond the standard contribution limits by taking advantage of the IRS’s total 401(k) contributions, which includes employee deferrals, employer matches, and after-tax contributions. Check with your plan administrator as not all plans allow after-tax contributions and conversions.

Required Minimum Distributions (RMDs)

Generally, taxpayers age 73 or older must take mandatory annual withdrawals from tax-deferred accounts, such as traditional IRAs and 401(k)s by December 31st. Individuals who reached RMD age in 2025, could delay their first withdrawal until April 1, 2026, but this means taking two RMDs in a single year. Penalties for missing the deadline can be steep so careful planning is required. For charitably inclined individuals over age 70 ½, Qualified Charitable Distributions (QCDs) allow direct donations up to $108,000 in 2025 to one or more qualified charities directly from an IRA custodian. When utilized strategically, QCDs allow individuals to support their favorite charities while satisfying RMD requirements and reducing taxable income at the same time.

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs)

FSAs and HSAs both allow individuals to pay for qualified medical expenses with pre-tax dollars through deductible contributions that reduce taxable income. FSAs are subject to the “use it or lose it” rule, meaning funds generally must be spent by year-end or during a short grace period, with only limited carryover allowed. If you are covered by a High-Deductible Health Plan (HDHP)², HSAs provide a triple tax advantage. Contributions are made on a pre-tax basis therefore reducing taxable income, growth is tax-free, and withdrawals made for qualified medical expenses are tax-free. Unlike FSAs, HSA funds can roll over indefinitely and be invested for long-term growth.

• The 2025 limit for FSA contributions is $3,300. Up to $660 can be carried forward if the employer allows.
• The 2025 HSA contribution limit is $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 “catch-up” contribution for those age 55 and older.

2. Time Income and Compensation Based on Tax Bracket Projections

As the year draws to a close, opportunities may present themselves to strategically manage when income is recognized through deferring bonuses, exercising stock options, or adjusting compensation timing. If you have flexibility in how or when income is received, it’s prudent to evaluate projected income tax liabilities and tax brackets for both the current and upcoming year. By doing so, you can determine whether it’s more advantageous to accelerate income into a lower-tax year or defer it to a future year if you a drop in income or subsequent tax law change is anticipated.

Stock Option Planning

Year-end is an ideal time to review your stock options and equity compensation to ensure your strategy aligns with both your financial goals and tax situation. Decisions around exercising options—whether incentive stock options (ISOs) or non-qualified stock options (NSOs)—can have significant tax implications. For ISOs, exercising without selling may trigger alternative minimum tax (AMT), while NSOs typically generate ordinary income upon exercise. Timing exercises before year-end may allow you to manage income levels, utilize losses to offset gains, or take advantage of lower tax brackets. If you’re considering selling shares, holding them long enough to qualify for long-term capital gains treatment can reduce your tax liability.

Compensation Timing

For individuals that participate in performance-based compensation structures there may be opportunities to shift their year-end bonus or commissions if they anticipate a lower tax bracket in the following calendar year. In doing so, individuals defer the income and associated tax liability to a year. Conversely, individuals may be able to pull forward their year-end bonus or commissions into the current year should they anticipate a higher tax bracket in the following calendar year. Coordinating compensation timing with deductions, retirement contributions, and capital gains can help optimize your overall tax position.

3. Manage Capital Gains Leveraging Strategic Investments

The timing and realization of appreciated asset sales can have a significant impact on tax liabilities. Holding assets for more than a year qualifies for preferential long-term capital gains tax rates. If individuals find themselves in a high-income year, deferring the realization of gains may be beneficial. Tax loss harvesting can be a useful tool to offset previously realized capital gains from a liquidity event or portfolio rebalancing. For individuals that received a capital infusion late in the year or were not able to generate sufficient offsetting losses, qualified opportunity zones can be advantageous for federal gain deferral.

Tax-loss harvesting involves the methodical and systematic realization of capital losses by selling securities in an investment portfolio that have declined in value to offset current and future capital gains. This strategy can generate significant annual “tax alpha”—designed with the intention of improving your returns through tax efficiency rather than market performance. Investors can deduct up to $3,000 of losses in excess of gains against their ordinary income per year while carrying forward any remaining losses to future tax years. To avoid tripping up the common pitfalls of the wash-sale rule, careful consideration should be given to avoid buying the same or substantially similar security within 30 days before or after the loss is realized.

Qualified Opportunity Zones provide tax incentives to investors who reinvest realized capital gains within 180 days of the sale. For eligible reinvested gains, the gain is deferred from federal income taxes until the earlier of December 31, 2026, or the sale or exchange of the investment. If the investment is held for at least 10 years, any subsequent appreciation of that investment is permanently excluded from federal capital gains tax upon sale or exchange. Individuals reinvesting capital gains into QOZs on or after January 1, 2027, can take a 10% basis step up for investments held for at least five years. Gains deferred after this date will be recognized on the fifth anniversary of the investment date. When coordinated in tandem with direct indexing, sufficient capital losses may be generated ahead of the deferral period expiration, thereby completely offsetting gain realization.

4. Optimize Deductions & Lock in Charitable Strategy

The OBBBA introduces a combination of taxpayer-friendly provisions coupled with limitations on itemized deductions and charitable giving. When filing your federal tax return, you can reduce taxable income by claiming the greater of the standard deduction or itemized deductions, but not both. The standard deduction is a fixed amount set by law and adjusted annually for inflation whereas “itemizing” allows you to deduct actual eligible expenses such as mortgage and investment interest, state and local taxes (SALT), charitable contributions, and unreimbursed medical expenses exceeding 7.5% of adjusted gross income.

The Standard Deduction

Starting in 2025, the standard deduction will increase permanently to $15,750 for single filers ($31,500 for joint filers), indexed for inflation annually. Taxpayers age 65 and older become eligible for an additional standard deduction of $2,000 for single filers ($1,600 per qualifying individual for joint filers).

Itemized Deductions

With increases to the standard deduction, some individuals may find it does not make sense to itemize. However, certain key updates can be leveraged to increase deductions and potentially make itemizing worthwhile again.

New Above-the-line Deductions

For tax years 2025 through 2028, two new “above-the-line deductions” are available to taxpayers regardless of whether they claim the standard or itemized deduction.

Utilize Expiring Tax Credits

Homeowners that have been considering clean energy and energy efficient home upgrades and installations should prioritize installation to take advantage of the Residential Clean Energy Credit and Energy Efficient Home Improvement Credit as both are scheduled to expire after December 31, 2025. Careful timing is required as eligible upgrades must be placed in service by year end.

5. Rebalance Portfolios with Asset Location in Mind

Effective tax planning also entails an understanding of the differences between asset allocation and asset location. Asset allocation determines your mix of investments like stocks, bonds, and alternatives whereas asset location focuses on the optimal placement of those investments within taxable, tax-deferred, and tax-free accounts. A year-end period review of your asset allocation and location ensures strategies are aligned with your goals while minimizing ongoing tax burdens and enhancing after tax-returns. The general process is as follows:

• Determine Asset Allocation: Work with your financial advisor to establish an investment mix based on your overall risk tolerance, financial goals, and investment horizon.
• Evaluate Account Types: Gain an understanding of the tax characteristics of your investment accounts.

  a. Taxable accounts (e.g., brokerage accounts, SMAs): Contributions are made with after-tax dollars. Invested income generated through dividends, interest, and realized capital gains are taxed annually.
  b. Tax-deferred accounts (e.g., Traditional IRA, 401(k), 403(b)): Contributions are generally tax-deductible, and investments grow tax-deferred, but withdrawals are taxed as ordinary income.
  c. Tax-exempt accounts (e.g., Roth IRAs and Roth 401(k)): Contributions are made with after-tax dollars, but qualified withdrawals are completely tax-free.

• Categorize by Tax Efficiency: Contemplate short- and long-term tax implications for certain asset types.

  a. Tax-inefficient assets are those that generate regular taxable income, introducing tax-drag on return. These typically include core and high-yield bonds, REITs, actively managed mutual funds with high turnover, and short-term investments.
  b. Tax-efficient assets are those that minimize or defer tax liabilities. These typically include municipal bonds, low turnover index funds and ETFs, tax-managed funds, and long-term investments.

• Match Assets to Accounts: Place tax-efficient investments in taxable accounts, tax-inefficient investment in tax-deferred accounts, and high-growth investments in tax-free accounts to maximize long-term appreciation in a tax-efficient manner.
• Maintain the Strategy and Periodically Review: To ensure target asset allocations and locations are consistent with everchanging personal financial circumstances and tax regulations, periodically review your portfolio and rebalance as necessary.

6. Finalize Annual Gifting & Review Estate Plan Goals

Year-end planning isn’t just about maximizing immediate tax savings but also incorporates key strategies to reduce exposure to future taxes.

Annual Exclusion Gifts

Annual exclusion gifts ($19,000 per recipient in 2025) can supplement lifetime gifting strategies but represent a smaller component of comprehensive wealth transfer planning. Gifts can be made either outright or via a trust for the beneficiaries’ benefit and can be in the form of cash, property, or assets. The annual exclusions are particularly useful for systematic transfers to multiple beneficiaries without eroding lifetime exemption. The key to maximizing this strategy lies in timing and asset selection. The exclusion doesn’t carry over from year to year so it is important to use your annual exclusion by December 31st.

529 Plans

529 Plans are state-sponsored tax-advantaged savings accounts designed to fund education expenses. Contributions are made with after-tax dollars, but earnings grow tax-free, and withdrawals are also tax-free if used for qualified education costs making this a beneficial tax and estate planning tool. There is no federal annual contribution limit though contributions above the annual gift exclusion ($19,000 for individuals and $38,000 for joint filers) will trigger gift tax consequences. As a workaround, donors can elect five-year gift averaging as known as “superfunding”, enabling up to $95,000 of contributions ($190,000 for joint filers) in 2025 without incurring gift tax. Rules vary by state with some states offering tax deductions on contributions and others imposing aggregate caps on account values. Should overfunding be a concern, designated plan beneficiaries can be changed, and beneficiaries may be able to rollover up to $35,000 during their lifetime into a Roth IRA, providing flexibility.

Direct Gifts to Universities or Medical Providers

Direct gifts made to an educational institution or medical provider on behalf of an individual are excluded from federal gift tax rules, allowing an unlimited amount to be given free of gift and estate taxes. To qualify, the gift must be paid directly to the school or medical provider and must be for tuition or medical expenses.

Estate & Wealth Transfer Planning

Year-end is an opportune time to evaluate long-term estate planning goals and needs to ensure yearly tax planning is well synchronized with your intentions. While households no longer need to anticipate the sunset of the Tax Cuts and Jobs Act (TCJA) in their estate plan, ever-changing life events such as family structures, financial circumstances, and unforeseen health concerns can prompt the need to reassess an estate plan.

Advanced Planning Techniques

Whether estate planning goals include asset preservation gifting strategies through irrevocable trusts or strategic tax mitigation, many advanced planning tools exist including, but not limited to intrafamily loan, Intentionally Defective Grantor Trusts (IDGTs), and Grantor Retained Annuity Trusts (GRATs).

Lifetime Gift & Estate Exemption

The federal lifetime gift and estate tax exemption allows individuals to transfer substantial wealth without triggering gift taxes—$13.99 million per person in 2025 ($27.98 million for married couples). Beginning in 2026, the federal exemption increases to $15 million This exemption represents a powerful wealth transfer opportunity, particularly when used strategically to gift assets that individuals expect to appreciate significantly or believe are currently undervalued.

If you live in one of the 17 states that levy an estate or inheritance tax, now is the time to engage in estate planning conversations to effectively mitigate future state level estate tax liabilities.

One Big Beautiful Bill Act (OBBBA): What Changed for 2025

The OBBBA includes significant changes that affect individuals and businesses. Highlights below are based on statutory summaries and IRS guidance to date; additional implementing guidance is expected.

Key Individual Changes

• Permanent TCJA Individual Marginal Tax Rate Structure: Top rate remains 37%; brackets made permanent.
• Increased Standard Deduction for 2025: $15,750 (single) / $31,500 (MFJ); indexed thereafter.
• Personal Exemptions: Permanently repeals personal exemptions.
• Child Tax Credit: Increased to $2,200 per qualifying child in 2025; indexed from 2026.
• Qualified Business Income (QBI) Deduction: Makes 20% deduction permanent while increasing the threshold for income phase-in limitations. Creates a new minimum $400 deduction for taxpayers with at least $1,000 of qualified income.
• Alternative Minimum Tax (AMT): New thresholds beginning in 2026 will expand the number of taxpayers subject to the AMT.
• Qualified Residence Interest: Makes permanent the lower cap on home acquisition indebtedness.
• Miscellaneous Itemized Deductions: Makes permanent the repeal of miscellaneous itemized deductions but allows an itemized deduction for certain educator expenses beginning in 2026.
• Itemized Deduction Cap: The benefit individuals receive from itemized deductions claimed after December 31, 2025 is limited to 35%, which is below the top marginal individual income tax rate of 37%.
• SALT Cap Temporarily Increased: Raised the SALT cap to $40,000 through 2029 (phase-outs may apply), reverting thereafter. The phase-out thresholds and cap increase by 1% annually.
• New Temporary Deductions: Above-the-line deductions for qualified tips (up to $25,000) and overtime (up to $12,500 single / $25,000 joint), and up to $10,000 of interest on certain auto loans are available through 2028 subject to income thresholds.
• Charitable Contributions: The itemized deduction for charitable contributions made after December 31, 2025 will only be allowed to the extent total contributions exceed 0.5% of an individual’s adjusted gross income (AGI). Reinstates a deduction for cash contributions to qualified public charities for taxpayers that do not itemize up to $1,000 (single, HOH, MFS) or $2,000 (MFJ).
• 529 Plan Enhancements: Expands the type of educational expenses that can be paid tax-free from 529 savings plans and increases to annual limit to $20,000 for K-12 expenses.
• Senior Deduction: New $6,000 deduction for taxpayers 65+ (subject to income thresholds) through 2028.
• Trump Accounts: Established new tax-preferred savings account, similar to individual retirement accounts for individuals under age 18.
• Residential Clean Energy Credits: Accelerated the expiration date of the 30% residential clean energy credit for expenditures made after December 3x1, 2025
• Qualified Small Business Stock (QSBS): Introduces a three-tiered gain exclusion rule that depends on the holding period for QSBS issued after July 4, 2025. Increases the current exclusion limit from $10 million to $15 million (or 10 times basis) for stock issued after July 4, 2025. Increase the current limit on assets held at the time of stock issuance from $50 million to $75 million.
• Qualified Opportunity Zones: Makes the opportunity zone incentive permanent. For investments made after December 31, 2026, a basis step-up of 10-30% is introduced depending on where the OZ is located.

Key Estate & Gift Tax Changes

• Lifetime Gift & Estate Exemption: The unified estate and gift tax exemption increases to $15M per person in 2026 (indexed for inflation thereafter), with portability retained. The generation-skipping transfer (GST) tax exemption amount is linked to the estate tax exemption, so these adjustments are also applicable to the GST election. The higher exemptions present renewed opportunities for generational wealth transfer, allowing families to implement strategic, long-term plans without the presence of a impending deadline.

Note: These strategies require professional guidance. Schedule a consultation to discuss applicability.

Questions or Need Help?

This checklist covers essential year-end considerations, but every situation is unique. For comprehensive details on any of these strategies, schedule a year-end planning session with PCM Tax to ensure you're maximizing opportunities and avoiding costly mistakes.

This guide provides general information and is not tax, legal, or investment advice. Consult with qualified professionals before implementing any strategy.

Reference

• A special, higher catch-up contribution of $11,250 is available for those age 60-63, bringing the total employee contribution limit to $34,750 in 2025. Combined with employer contributions and non-deductible after-tax contributions, the limit reaches $81,250.
• For 2025, the Internal Revenue Service (IRS) defines a HDHP as any plan with an annual deductible of at least $1,650 for an individual or $3,300 for a family. The maximum annual out-of-pocket expenses for an HDHP are $8,300 for an individual or $15,500 for a family.