Reduce Next Year's Tax Bill
Reduce next year’s tax bill starting now. How? Let’s discuss some strategies.
First, if you haven’t already maxed out your taxed-advantaged accounts, start. You can still add to your 401(k) by increasing your contribution in December. Contact your HR department to do this. If you have an IRA account, you can still add to them until April of 2026, but doing it earlier is better. Additionally, if you have a Health Savings Account (HSA), you also have until April of 2026 to add to it. But, maxing it out before January 1st will reduce your taxable income for 2025.
Next, sell investments that are losses to offset gains in other areas. You can offset capital gains entirely and up to $3,000 of normal income if your losses exceed your gains. Avoid what’s called the wash-sale rule. In other words, don’t repurchase the exact same investment within 30 days of selling.
Make sure to take your Required Minimum Distribution (RMD) if you are eligible by December 31st. If you inherited and IRA or you’re 73 and older, you must take an RMD. However, if you donate money directly from your IRA to a qualified charity, it reduces your taxable income.
If you own a small business, you can invest in equipment or software for your business before Dec 31st. Consider adding money to your retirement funds. Pay some business expenses early so that you can deduct those payments for 2025. You can also defer some of your income to January if you use the cash accounting method.
Check your withholding if you owe every year or you get a huge refund each year. Getting a refund means you overpaid throughout the year. You can either redo your W-4 at work or increase your estimated payments if you own your own business. You can also fund a 529 Plan (a tax-advantaged savings plan for education expenses) before Dec 31st if appropriate.
Moral of the story:
It’s not too soon to start to reduce next year’s tax bill now. I’ve given you some suggestions but also, it’s time to start to collect receipts and statements now. List every major even you had this year. Things like purchasing a home, employment change, business and/or medical expenses, casualty losses, etc. can be documented now.