Year-End Tax Planning for Individuals

As we approach 2025, future tax policy is bracing for change in the coming years. With election results now in the rearview, the road ahead for policy shifts begins to take shape, providing a clearer framework for strategic decisions. However, tax planning for individuals will still require thoughtful consideration and flexibility, as expiring tax provisions hang in the balance, leaving questions about whether they will be extended, modified, or allowed to lapse.

Inaction carries its own risks, and taxpayers should anticipate potential shifts to proactively position their tax strategy, no matter what lies ahead. We’ve highlighted important information in this article to help guide your decisions as the situation unfolds.

Expiring Tax Provisions

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about landmark tax reforms, with several key provisions scheduled to expire at the end of 2025. While there may be opportunities for Congress to extend these changes, it’s important to anticipate their potential expiration.

With Republicans gaining control of the White House and Congress, there’s a higher chance of major GOP policy proposals becoming law, though the federal deficit and narrow majorities may slow the process, with policy rollouts anticipated mid-year.

Below are the standout provisions to watch.

Estate and Gift Tax Exemption

The federal estate tax exemption currently stands at $13.61 million for individuals and $27.22 million for married couples in 2024. This amount is slated to increase in 2025 to $13.99 million per individual and $27.98 million for married couples. However, unless Congress acts, the exemption will revert to an inflation-adjusted base of approximately $7 million per individual in 2026. This reduction could lead to higher estate tax liabilities for individuals with estates exceeding the new threshold.

Planning Tip: To take full advantage of the high exclusion amounts now, married couples who may not utilize the entire exemption could consider using 100% of one spouse’s exemption to lock in at least part of the increase. Any gifts made under the current exemptions will not be subject to “clawback” even if the exemption is reduced in the future. That said, careful consideration of how gifting may affect current and future financial needs is essential.

Inherited IRAs

Under the SECURE Act, non-spouse beneficiaries inheriting a retirement account are generally required to distribute the funds within 10 years of the account holder’s passing. However, the initial version of the law lacked clarity on whether these beneficiaries had to take required minimum distributions (RMDs) annually during the 10-year period or if they could wait until the final year to withdraw the entire balance.

Final regulations recently issued by the IRS have clarified that:

• If the account holder passed away before reaching their RMD start date, non-eligible beneficiaries have flexibility in withdrawing funds. They can either choose to withdraw the entire amount at the end of the 10 years or spread-out withdrawals over the 10-year period, with no annual minimum requirements, as long as the account is fully distributed by the 10th year.
• If the account holder passed away after starting RMDs, the beneficiary must continue taking RMDs annually for the next nine years. The beneficiary must withdrawal the remaining balance by the end of the 10^th year.

Final rules for this change are set to take effect in 2025. While a series of IRS notices provided penalty relief for missed RMDs from 2021 to 2024 as a result of collective confusion, beneficiaries are still required to distribute the full account balance within the 10-year period.

Planning Tip: Given the complexity of the new rules, beneficiaries must carefully plan their distribution strategy for inherited accounts. Neglecting to consider specific rules and exceptions could result in significant tax consequences.

Top Income Tax Rates

Favorable income tax rates for high earners are scheduled to expire in 2026, with the top individual rate set to increase from 37% to 39.6%. Alongside this change, the scheduled expiration of the 20% qualified business income deduction could trigger a rise in tax rates by as much as 10% for some owners and operators of pass-through entities.

Planning tip: If Congress does not act to extend the lower tax rate before the end of 2025, consider accelerating income recognition to take advantage of the lower rate before it expires. Owners may also need to take a closer look at operating structures to determine if converting to a corporation may provide a more tax-friendly environment for your business. The corporate tax rate is currently set at a permanent 21%.

SALT Cap Set to Expire

Before the TCJA, there was no limit on state and local tax (SALT) deductions. However, since the law was enacted in 2017, the deduction has been capped at $10,000, significantly reducing the amount taxpayers can write-off, particularly in high-tax states like California. With the impending expiration of the TCJA, the cap is slated to end. However, if Congress acts to extend the SALT limit, several states, including California, have introduced elective workarounds that allow pass-through entities to pay taxes at the entity level, effectively bypassing the cap.

Planning Tip: Evaluate how SALT deductions may impact your investment structure and future acquisition plans, as well as the timing of your tax payments. Should Congress lift the cap, deferring payments on state, local, and property taxes until after the cap expires could offer significant benefits. Since these taxes are generally deducted in the year they are paid, rather than when they are assessed, carefully timing your payments could help maximize your deductions and reduce your overall tax liability.

Standard Deductions

The TCJA nearly doubled the standard deduction amount. If these amounts are not extended, the standard deduction will revert to pre-TCJA amounts, potentially resulting in a higher tax bill. It’s important to assess whether this reduction in the standard deduction will push you into a higher tax bracket or whether itemizing deductions might provide a better tax outcome. If itemizing becomes more favorable, consider timing deductible expenses—such as charitable contributions, state and local taxes, and mortgage interest—so they can be accelerated or deferred into 2026 to maximize tax benefits.

Itemized Deductions

Personal exemptions and a variety of itemized deductions, which were temporarily suspended under the TCJA, will be restored after 2025. These include deductions for expenses previously subject to the 2% floor, such as investment management fees and tax planning costs. Home office deductions for eligible employees will be reintroduced, and there will be higher limits on mortgage interest deductions, along with a deduction for interest on home equity loans. However, these itemized deductions will face a 3% limitation, known as the Pease limitation, which reduces the total amount of deductions based on income levels. It’s important to review your deductions carefully to ensure you’re optimizing your tax strategy in light of these changes.

Alternative Minimum Tax

Under current TCJA law, lower alternative minimum tax (AMT) rates are set to change in 2026, along with phaseout thresholds. The exemption for married couples filing jointly will decrease from $133,300 to $84,500 ($85,700 to $54,300 for single filers), which could increase the number of taxpayers subject to AMT. To minimize the impact, taxpayers may want to consider exercising incentive stock options, adjusting investment portfolios, or reviewing tax strategies to manage AMT liability.

Opportunity Zone Investments

The opportunity zone program, which allows for tax deferral and potential tax forgiveness on capital gains, will expire in 2026. If you have invested in opportunity zones, consider the timing of your investments and potential exits to maximize tax benefits.

Recent California Tax Legislation

With a history of suspending or limiting Net Operating Loss (NOL) deductions and limitations on income tax credits, California’s recent legislation continues this pattern starting in 2024. Individuals and corporations with a net income or modified adjusted gross income of $1 million or more will be unable to use NOL deductions for tax years beginning on or after January 1, 2024, and before January 1, 2027. However, any NOLs denied during this period can be carried over for up to three additional years. The legislation also imposes a $5 million annual limit on the use of certain tax credits, including the California pass-through entity elective tax credit, with unused credits carrying over to future years.

Planning tip: Taxpayers impacted by these suspensions should carefully consider their estimated tax payments for 2024. California law provides an exception to the estimated tax understatement penalty if the underpayment results from new legislation enacted during the year, which could be a helpful consideration when adjusting payment strategies.

Wealth Transfer Planning Opportunities

In a high-interest rate environment, there are several planning opportunities to tap into for tax-efficient wealth transfer and estate planning. Higher interest rates allow you to lower the value of future gifts for tax purposes, which reduces the amount of taxes owed later. The higher the interest rate, the more advantageous this strategy becomes.

Several trust strategies—such as gifting depressed-value assets to an intentionally defective grantor trust (IDGT), selling an asset to an IDGT for an installment note, gifting your home to a Qualified Personal Residence Trust (QPRT), or funding a Grantor Retained Annuity Trust (GRAT)—offer effective ways to transfer wealth, reduce estate taxes, and shift future appreciation to heirs, helping to preserve family assets across generations

In addition to trusts, leveraging strategies like intra-family loans can also help minimize tax liabilities. By using current interest rates, you can provide liquidity to family members and reposition appreciating assets outside your estate, ultimately strengthening your long-term wealth transfer plan.

Traditional Year-End Tax Strategies

There are several tried-and-true strategies to consider before year-end. Here are a few to consider:

• Sell underperforming assets at a loss to offset capital gains. Tax-loss harvesting lowers taxable income by reducing net gains, helping to reduce your overall tax liability.
• Maximize your 401(k) contributions. The contribution limit for individuals under 50 is $23,000, while those 50 and older can contribute up to $30,500.
• Donate to your preferred charity. Explore effective charitable giving methods to offset tax burdens, such as through Donor-Advised Funds or IRA contributions. Consult with an advisor to find the best fit for your charitable goals.
• Make a gift. Annual exclusion gifts allow you to transfer up to $18,000 per recipient ($36,000 for married couples) without triggering gift taxes, which helps reduce estate taxes and support wealth transfer.
• Accelerate or defer income. With changing tax laws, including the expiration of TCJA provisions, review your strategy for accelerating income or deferring deductions to align with potential tax increases in the coming years.

Next Steps

Take time to assess your financial situation and how upcoming changes could impact your situation. Work with your advisor to identify the best course of action for this tax season and as we head into changing tax policy in 2026.

Contact us at (805) 963-7811 with any questions you may have.