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INDIVIDUALS – 2025 Year-End
Update & Planning Considerations

Ike Braden, CPA - Tucson AZ

DOWNLOAD - INDIVIDUALS- 2025 Year-End Update & Planning Considerations

 

The following are some of the tax breaks from which you may benefit, as well as the strategies that can be employed to help minimize your taxable income and resulting federal tax liability for 2025. 

I have compiled a brief list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you, but you may benefit from many of them.

  • Net Investment Income Tax (NIIT)
  • 9% Additional Medicare Tax
  • Maximize Long-Term Capital Gain
  • Recognizing Capital Losses
  • State & Local Taxes (SALT)
  • Max retirement plan contributions
  • Making IRA Contributions
  • Postpone Income & Accelerate Deductions
  • Shift Education Tax Incentives
  • Consider Converting to a Roth IRA
  • Bunching Strategy
  • Health Savings Account contributions
  • Sale of a Principal Residence
  • Mortgage Interest Deduction
  • Health Flexible Spending Arrangement (FSA).
  • Extra Senior Deduction
  • Related Party Rent
  • Expanded & New Tax Breaks

Net Investment Income Tax (NIIT)

  • Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
  • As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.

 0.9% Additional Medicare Tax

  • The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income.
  • For Employees – the employer must withhold 0.9% for each employee whose Medicare wages is over $200,000. (Medicare rate 1.45% + 9% = 2.35%). The employee is responsible for paying the additional 0.9% that is not withheld by the employer.
  • For Self Employed individuals - the effect of the additional 0.9% Med tax is in the form of higher SE taxes. (Medicare tax rate 2.9% + 0.9% = 3.8%).
  • Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

Maximize Long-Term Capital Gain

  • Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income (see chart below). If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate.
  • The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount. If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.
2025 Capital Gains Rate

Recognizing Capital Losses (loss harvesting)

  • Taxpayers with unrecognized capital losses should consider recognizing those losses this year to offset capital gains that would otherwise be subject to the 15% or 20% long-term capital gains tax rate. Capital losses can also offset up to $3,000 ($1,500 in the case of a married taxpayer filing a separate return) of ordinary income if capital losses exceed capital gains by at least that amount. Recognizing capital losses to offset capital gains can also reduce the amount of income subject to the net investment income surtax.

Itemized Deductions – State and Local Taxes (SALT)

  • Taxpayers who itemize their deductions can deduct certain taxes paid to state and local governments. The individual SALT deduction cap increases from $10,000 to $40,000 for 2025. (It further increases the cap to $40,400 in 2026, and by an additional 1% in 2027, 2028, and 2029). Currently, this increase is set to revert back to $10,000 in 2030.
  • The Act phases out the deduction for taxpayers with modified adjusted gross income (MAGI) greater than $500,000 in 2025. (The phaseout threshold increases to $505,000 in 2026, and by an additional 1 % after).

Increasing Contributions to 401(k) plans, SIMPLE pension plans, and Keogh plans.

  • Some individuals may be able to reduce AGI by increasing contributions to retirement plans such as 401(k) plans, SIMPLE pension plans, and Keogh plans.

Making IRA contributions.

  • Taxpayers have until the tax return filing deadline in April to make IRA contributions for 2025. Unlike Keogh plans, which must be in existence by year-end, IRAs can be set up when the contribution is made next year. Taxpayers might want to make IRA contributions earlier rather than later to maximize tax-deferred income on the contributed amount. Eligible taxpayers can also deduct contributions to traditional IRAs, subject to limitations.

Postpone Income & Accelerate Deductions

  • Taxpayers with income near the threshold for this year may benefit from accelerating deductions or deferring income, when possible, so their taxable income falls below the threshold. Similarly, if the taxpayer is well below the threshold this year but expects to exceed it next year, consider options to pull more income into 2025. This could have the added benefit of lower tax on the accelerated income in the event of higher tax rates next year.
  • Postpone income until 2026 and accelerate deductions into 2025 if doing so will enable you to claim larger deductions, credits, and other tax breaks that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.

Shift Education Tax Incentives

  • Parents can shift eligibility for claiming education tax credits or student loan interest to their student/child by choosing not to claim them as a dependent.
  • Particularly effective for taxpayers with income too high to claim the education credit/student loan interest deduction.

Consider Converting to a Roth IRA

  • If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2025 if eligible to do so. Discuss this option with your financial advisor or plan administrator.
  • Keep in mind that the conversion will increase your income for 2025, possibly reducing tax breaks subject to phaseout at higher AGI levels.

Standard Deduction vs Itemized Deduction (Bunching Strategy)

  • Many taxpayers won't want to itemize because of the high basic standard deduction amounts that apply for 2025 ($31,500 for joint filers, $15,750 for singles and for marrieds filing separately, $23,600 for heads of household), and because many itemized deductions have been reduced (such as the $10,000 deduction limit on state and local taxes) or abolished (such as the miscellaneous itemized deduction and the deduction for non-disaster related personal casualty losses).
  • You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a restricted amount of debt, but these deductions won't save taxes unless they total more than your standard deduction.

Strategy for Maximizing Itemized Deductions

  • Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good.
  • For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year.

Health Savings Account (HSA)

  • HSAs are beneficial since you can (1) Deduct the contribution (2) Pay no tax on the earnings (3) Pay no tax on qualified withdrawals 
  • Individuals who are covered by a qualifying high deductible health plan (and are generally not covered by any other health plan that is not a qualifying high deductible health plan) may make deductible contributions to an HSA, subject to certain limits. Becoming HSA-eligible before year-end can salvage an HSA contribution made earlier in the year.

Individuals or employees who were covered by a high-deductible health plan at any time during the year and make contributions to an HSA may be eligible for an above-the-line deduction.

  • If you become eligible in December 2025 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2025.
  • For 2025, the maximum deduction for an eligible individual with self-only coverage under an HDHP is $4,300. For an individual with family coverage under an HDHP, the limit is $8,550.
  • Individuals who are age 55 or older can make catch-up contributions in addition to their regular contributions for the year. The annual catch-up contribution limit is $1,000.
  • Becoming eligible in December can salvage a contribution for the entire year. For computing the annual HSA contribution, taxpayers who are eligible individuals in the last month of the tax year are "deemed eligible" during every month of that year. Thus, they can make contributions for months before they enrolled in an HDHP.

Caution: A taxpayer who contributes to an HSA under the "deemed eligible" rule must remain eligible during the entire testing period (a 12-month period beginning with the last month of the tax year). Otherwise, any contributions made during a month when the taxpayer was "deemed eligible" are includible in gross income and subject to a 10% penalty tax.

Sale of a Principal Residence

  • Strategic timing can yield tax benefits. A taxpayer who sells property used as a principal residence for at least two of the five years before the sale may exclude up to $500,000 in gain if married and filing a joint return.
  • Taxpayers with another filing status (single, head-of-household and married filing separately) may exclude up to $250,000.
  • “Surviving Spouse Exclusion” - A surviving spouse can qualify for the higher $500,000 exclusion if the sale occurs not later than two years after the decedent's death, if the requirements for the $500,000 exclusion were met immediately before death, and the survivor did not remarry.

Mortgage Interest Deduction.

  • If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., your mortgage) could be limited.
  • The mortgage interest deduction on mortgages remains capped at $750,000 for loans obtained after December 14, 2017. The deductible portion is the interest allocable to $750,000 ($375,000 in the case of married taxpayers filing separately).
  • If you have a mortgage on a principal residence acquired before December 16, 2017, the limitation applies to mortgages of $1,000,000 ($500,000 in the case of married taxpayers filing separately) or less. However, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.

Health Flexible Spending Arrangement (FSA).

  • For plan years beginning in 2025, the contribution limit for health FSA’s is $3,300. The maximum carry over is $660.

Extra Senior Deduction.

  • Beginning in 2025 there is an extra senior deduction of $6,000 for those over 65 years old ($12,000 for joint filers). This deduction is reduced when the taxpayers adjusted gross income exceeds $75,000 for single filers ($150,000 for joint filers).

Related Party Rent

  • Rent arrangements between related parties are subject to close IRS scrutiny. The lease arrangements should be supported by written lease agreements and the rent charged should be reasonable. It is important to show that a valid lease exists and a reasonable fair market rental rate is being charged.
    • Renting below fair market value – if it results in a loss then it may not be deductible.
    • Renting above fair market value – IRS may reclass as wage income, could result in overdue payroll tax & penalties or could be reclassed to distribution which would reduce the rent deduction.

Expanded and New Tax Breaks. 

  • No Tax on Tips: Individuals in occupations where tipping is customary can deduct up to $25,000 in tips.
    • Phases out when MAGI exceeds $150K single ($300K joint). Reduced by $100 for each $1,000 over MAGI threshold.
  • No Tax on Overtime: Individuals can deduct up to $12,500 in qualified overtime pay.
    • Phases out when MAGI exceeds $150K single ($300K joint). Reduced by $100 for each $1,000 over MAGI threshold.
    • If the taxpayer is a married individual, this provision applies only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.
  • Car Loan Interest Deduction: For 2025-2028, interest paid on loans for new U.S assembled vehicles is deductible up to $10,000 per year, subject to income limits and reporting requirements.
    • Original use must begin with the taxpayer – must be a new vehicle purchased in 2025.
    • Phases out when MAGI exceeds 100K (200K joint). Reduced by $200 for each $1,000 over MAGI threshold.

Please call me at your convenience so we can set up an appointment to discuss your 2025 tax return and determine if any estimated tax payment may be due before year end. 

 

Sincerely, 

Ike Braden, CPA PLLC

DOWNLOAD - INDIVIDUALS- 2025 Year-End Update & Planning Considerations