Bunching Strategy: Bunching your itemized deductions is a technique that involves accumulating deductions, so they are high in one year and low in the following year. You can benefit from the “bunching” strategy. It’s very typical for most taxpayers to wait until tax time to add up everything and use the higher of the standard deduction or their itemized deductions. This year, it will be more work to project the total itemized deductions with the introduction of the higher SALT limit. Additional planning may be required.

Bunching Charitable Donations: Consider bunching charitable donations every other year while taking the standard deduction in the off years. Increasing your charitable deduction in 2025 may be more advantageous with the onset of the .5% floor on charitable deductions beginning in year 2026.

A popular vehicle for maximizing your charitable donations is the use of a Donor-Advised Fund (DAF). The DAF functions as a conduit. The taxpayer receives an immediate tax deduction up to certain limits when the money is directed into the fund. The donor decides what charities will receive the money and when it shall be paid out. In a high-income year, front loading the fund with a larger contribution can be quite nice. The assets within the fund also enjoy tax-free growth. Please note that the charitable contribution limit for 2025, including donor-advised funds, is 60% of AGI for contributions of cash, and 30% of AGI for contributions for non-cash assets if the assets were held more than one year.

We have found that charities are very active with their solicitations during the holiday season and would be happy to receive gifts near year-end or early in the new year. If it appears that you think you will be itemizing your deductions in 2025, but not next year, consider making last minute cash and non-cash charity donations before year-end. If you do not have the extra cash available today, you can use a credit card before year-end and still qualify for a 2025 tax deduction. If the gift is appreciated stock, the tax benefits are even greater as you qualify for the larger charitable contribution tax deduction and do not have to pay tax on the capital gains of the appreciated stock.

Also, you don’t necessarily have to donate cash. You could also consider non-cash contributions of household goods, clothing, and furniture to the appropriate charity.

We often like to recommend a Roth IRA conversion strategy for those taxpayers who have already or are still planning to make a large charitable contribution before year-end. For example, we had a client who consistently contributed $20,000 per year to their favorite charities. We recommended instead they ‘bunch three years’ worth of their contributions into one year ($60,000) by utilizing a Donor Advised Fund and funding it with appreciated stock. By combining these tax strategies, the client was able to increase their overall Roth IRA conversion. In utilizing the Donor Advised Fund, they were able to distribute the monies to their favorite charities over the three-year period and were able to accelerate the $60,000 deduction in the current year. Plus, the client did not have to pay the long-term capital gains tax on the appreciated stock!

To qualify for the charitable contribution deduction, contributions must be made to approved Section 501(c)(3) organizations. If you are uncertain if an organization is approved, please refer to https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations.

Charitable Giving: Under the current tax system, a focus on controlling AGI can provide tax savings. Taxpayers ages 70 ½ and older can transfer up to $108,000 directly from their IRA over to a charity in 2025 ($115,000 in 2026), satisfying all or part of the RMD with the IRA-to-charity maneuver. For married couples, the limit is $216,000 for 2025 ($230,000 for 2026). It can be viewed as making a charitable donation with pre-tax dollars. This is especially fruitful when the alternative of using the after-tax dollars to fund the donations does not reduce your taxable income due to the higher standard deduction. 

Caution: If you are over age 70 ½ and make a current year tax-deductible IRA contribution while also planning a current year QCD from your RMD, your plan becomes more complicated due to the “anti-abuse” provisions. The provision was enacted to prevent individuals from deducting the IRA contribution and subsequently using a QCD vehicle as a pre-tax charitable donation with the same dollars. Married couples with separate IRA accounts have additional flexibility in bypassing the rules.

This is a great time of the year to clean out your basement and garage. However, please remember that you can only write off these non-cash charitable donations to a charitable organization if you itemize your deductions. Please do yourself a favor and follow the substantiation rules to tilt the scale in your direction if the deduction is questioned by the IRS. Determining the value of non-cash donations can sometimes be challenging. It can never hurt to have pictures of the donated items (cell phone cameras make this much easier). The more detailed the receipt, the better. Please send cash donations to your favorite charity no later than December 31, 2025. Be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need an acknowledgement from the charity. Many taxpayers kindly help various charities by making non-cash donations.

Tax Tip for Coaches Who Still Itemize their Charitable Deductions: Many taxpayers have children who participate in youth, intermediate or even high school level sports. If dad or mom volunteers their time as coaches, assistant coaches, timekeepers, etc., they can be eligible for an income tax deduction for various out-of-pocket expenses incurred. For example, miles driven on their cars while performing their role as coach are deductible charity miles. Many teams travel out of town to compete. You are entitled to deduct certain travel expenses as a charitable deduction. See the IRS website Newsroom for “Tips for Taxpayers Who Travel for Charity Work” for a list of qualifying deductions. Of course, you must be eligible to itemize your deductions vs. taking the standard deduction to benefit from this strategy.

My favorite substantial charitable gift is leaving a portion of your IRA or retirement plan to a charity of your choice after you and your spouse die. Few taxpayers do this. What is much more typical is to leave money to charity through a bequest (after-tax dollars). Please see Who Gets What? in our books and presentations.

If you want to give money to a charity and get the deduction this year, but don’t know which charity you want to benefit from your donation, you should consider donor directed funds that could be set up by a group like The Pittsburgh Foundation or a donor advised fund as discussed earlier.

As mentioned earlier, if you plan to make a significant gift to charity this year, consider gifting appreciated stocks that you have owned for more than one year rather than cash. Review your tax brackets to help determine how you can maximize the deduction. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and therefore, you never have to pay taxes on the profit! If you really like the appreciated stock that you donated, use the non-donated cash to repurchase the donated securities. Essentially, you still own the same stock except with a higher tax basis in the newly acquired shares.

Do not donate stocks that have lost value. If you do, you can’t claim a loss. In this case, it is best to sell the stock with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss.

Higher 401(k)/403(b) Contribution Limits: The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $23,500 for 2025. In 2026, the annual limit amount has been increased to $24,500. The 2025 catch-up contribution limit for participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan for employees aged 50 and over is $7,500 and is increased to $8,000 for 2026, except for employees age 60 to 63. Employees aged 60 to 63 can contribute a catch-up limit of $11,500 vs. $7,500 for 2025 and $12,000 vs. $8,000 for 2026.

Planning Note: We are big proponents of using Roth 401(k) and Roth 403(b) plans for elective deferral contributions. We also love gifting to your children who then use those gifts to fund their Roth accounts. Considering the current increased tax rate structure on certain investment income and the Section 199A deduction for business owners, an increased focus on reducing both adjusted gross and taxable income can be beneficial. Higher income taxpayers should consider switching back to making tax-deductible retirement plan contributions instead of funding their Roth accounts. An ideal strategy may be to split your contributions during the year if you’re in overlapping tax brackets. For example, consider making tax deductible contributions to reduce your income to the bottom level of your upper tax bracket and contribute the remaining balance into your non-deductible Roth account that is in the lower tax bracket. You have flexibility in making these types of changes during the year if your financial circumstances should change. If you’re interested in this strategy, be sure to discuss this with your professional tax preparer so any adjustments can be made to your quarterly tax estimates if necessary. A practical approach is to simply hedge against higher future tax rates by splitting your current year 401(k)/403(b) contributions equally into deductible and non-deductible Roth contributions.

Make a Tax-Deductible IRA Contribution: For those taxpayers who qualify, you can make a tax-deductible contribution of $7,000 with a catch-up (for taxpayers 50 or older) of an additional $1,000. The contribution can be made until April 15, 2026, and still be a deduction on your 2025 tax return. There are income limits to this strategy so please check with your tax preparer to make sure you qualify.

Planning Note: Since the IRA contribution can be made after the end of the calendar year, calculating the actual tax savings provides a great advantage and should not be overlooked.

Back-Door Roth IRA Contributions: We love back-door Roth IRA contributions. For those of you who don’t qualify for a regular Roth IRA contribution (because your income is too high) and who have no traditional IRAs, you can still take advantage of a nice loophole in the tax code (back door Roth). Consider making a traditional IRA contribution and converting it immediately to a Roth IRA. You will run into complications with this strategy if you have other traditional IRAs. Once again, if this strategy fits your situation, make your 2025 contribution as soon as possible and repeat the process with your 2026 IRA contribution in early January 2026. If you are married with adequate earned compensation, the back-door Roth IRA strategy will be applicable to your non-working spouse.

Caution: If you are planning to do a rollover from a qualified plan to an IRA account prior to the end of the year, the above strategy will be unsuccessful, and the conversion will result in unexpected taxable income. It will not matter if the IRA contribution and the immediate Roth conversions occurred earlier in the year before the rollover date. If both transactions occur in the same year, you could trigger taxable income.

For those of you who can afford it, we encourage establishing and funding a Roth IRA for your children or even grandchildren and get a tax-free retirement fund started for their benefit. The longer period of tax-free growth provides a greater benefit. Like any IRA, the child or grandchild must have earned income to qualify for a contribution.

Funding Self-Employed Retirement Plans: If you are self-employed, you have other retirement savings options. We will review these alternatives with you when you come in for your appointment. One of my favorites for many one-person self-employed businesses is the one-person 401(k) plan.

Most self-employed retirement plans allow for contributions to be made as late as October 15^th of the following year, assuming you filed a tax extension. Having this deferred funding benefit allows you to calculate various levels of savings based on various contribution amounts. For taxpayers ages 50 and older, the 2025 and 2026 maximum contribution amounts can be as high as $77,500 and $80,500, respectively. Beginning in 2026, for those between ages 60 and 63, the maximum contribution amount can be as high as $84,500.

Another note to consider for 2025, if you implement a Solo 401(k) in 2025, you may be eligible for the Auto-Contribution Credit of $500 per year for 3 years (for the self-employed owner) or the 401(k) Startup Cost Credit of $5,000 per year for 3 years if you have non-owner employees. Please contact your tax professional to see if you are eligible for either one of these tax credits.

Increase Tax-Favored Income: Converting taxable interest to tax-exempt interest will serve to reduce AGI. For example, moving money from CDs or money market accounts will not create any taxable income. Alternatively, selling corporate bonds may produce a taxable gain and reduce or offset the benefits. Note: Tax-exempt interest is included for calculating your IRMAA rates.

Required Minimum Distributions (RMDs) in 2025: This is very useful. As a result of SECURE Act 2.0, the ages for taking RMDs changed. For those born between 1951 and 1959, RMDs now begin at age 73 vs. age 72. And for those born in 1960 or later, RMDs will now begin at age 75. The changes to the RMD ages can significantly impact and increase your Roth IRA conversion planning opportunities by giving you more years to make conversions before you need to begin drawing down on your IRAs. Interesting planning point: while the IRS continues to increase the RMD age from 70 ½ to 73 or 75, you are still able to take advantage of Qualified Charitable Distributions (QCDs) at age 70 ½. This means, you do not have to be of RMD age to take advantage of QCDs. If you are making charitable contributions and are age 70 ½ or more, we strongly suggest you consider the merits of utilizing QCDs as part of your tax strategy in your charitable giving. This is especially important if you are someone who does not qualify for itemizing your tax deductions. By doing so, the charitable contribution is sent directly from your IRA to the charity without any income taxes being paid. If you are the beneficiary of an inherited IRA and you are age 70 ½ or more, you may use it to make QCDs. This is a simple summary, and we encourage you to consult your tax practitioner on the merits of this strategy if it makes sense for you.

Sometimes during the planning process, we discover if you make a larger QCD, you may reduce your Income-Related Monthly Adjustment Amount (IRMAA) bracket and benefit your charity at the same time. The question comes up, “Would you rather pay Uncle Sam additional money or your charity?” That question seems simple, but proper planning can identify those opportunities.

As a reminder, your RMD needs to be taken before any Roth IRA conversion can be executed.

A Helpful Tip: If you are currently using QCDs, please make sure you receive acknowledgement letters from the charitable organizations for any single donation of $250 or more before filing your tax return. The IRS requires the letter under the Substantiation and Disclosure requirements for the donation to be tax-deductible.

Alert: If you are subject to 2025 RMD rules and your pension income is entirely from qualified plans such as 403(b)s and 401(k)s, you should consider an IRA rollover or partial rollover before December 31, 2025. This will enable you to take advantage of QCDs by using pre-tax retirement money for the 2025 donations instead of using after-tax cash, and for 2026, the QCDs will make some of your 2026 RMDs non-taxable.

Caution: For those seniors still working and doing back-door Roth conversions, an IRA rollover would dilute the intended benefit of the back-door strategy.

Important Early Thought for 2026: If you are considering using your RMDs from your IRA to make QCDs, try to be proactive. Advanced planning with your tax advisor and investment advisor (if you have one) will ease the process while achieving your charitable giving goal and maximizing the income tax savings.

Maximize your HSA Contribution: HSAs are better than Roth IRAs or regular IRAs or anything else other than an employer’s contribution to your retirement plan. If you are enrolled in a Health Savings Account (HSA) plan, it is not too late to maximize your 2025 tax deductible contribution to the account. You have until April 15, 2026, to fund your HSA account and still receive a 2025 tax deduction. The 2025 contribution limits are $4,300 for self-only coverage and $8,550 for family coverage. Those who are age 55 and older can contribute an additional $1,000 as a catch-up contribution. This means a total of $10,550 may be able to be contributed to your HSA account if both spouses are age 55 or older. Note: the additional $1,000 catch-up contribution limit needs to be contributed to separate spousal HSA accounts. Like an IRA contribution, the exact amount of tax savings can be calculated. It is the only section in the Internal Revenue Code (the Triple Crown if you will) that allows a tax deduction on the way in tax-free growth and tax-free qualifying distributions. For those who can afford it, fully funding the HSA account and never using the funds to pay for current medical expenses (using other monies to pay for medical expenses incurred) can allow for a big pot of tax-free money to accumulate overtime to be used for future medical costs. These funds can come in handy during retirement when you normally experience more medical expenses while having less annual income. Also, once you reach age 65, you can use the money for reasons other than medical expenses. These non-qualifying distributions will be penalty-free but subject to income taxes. It is analogous to owning an extra IRA account without being subject to RMD rules.

Planning Note: Currently, there is not a ‘timing’ requirement for qualifying distributions to occur in the same year as the qualifying expenses were incurred. So if you wanted, while you are still working and under a high deductible health plan, you could pay for your qualified health expenses outside of the HSA, save the receipts, and sometime in the future, so long as the IRS still permits, you could withdraw the funds from your HSA equal to the amount of the qualified health expenses that you have receipts for, and take a distribution income-tax free. The only caveat is the HSA withdrawal cannot be for an expense incurred prior to the date the HSA was established.

What if you do not have enough money to fund your HSA in a year but have significant money in your IRA? There is a once-in-a-lifetime rollover option from an IRA to fund your HSA account. This technique is called a Qualified HSA Funding Distribution (QHFD). Since HSAs have a triple tax benefit, it could be a good tax planning strategy for someone who does not have enough cash to fund their HSA. There are specific conditions for utilizing this technique, however, so we encourage you to contact your professional tax preparer before considering this option. Where we see this tax strategy being the most beneficial is for someone under the age of 59 ½ who would not otherwise qualify for penalty-free distributions from their IRA.

Pennsylvania 529 Plan Contribution Deduction: Don’t miss out on the state tax deduction for contributions to a Section 529 College Saving Program. A taxpayer can reduce their PA taxable income up to $19,000 per plan beneficiary (kids, grandkids, nieces, nephews, etc.). Married couples can deduct up to $38,000 per beneficiary per year, provided each spouse has taxable income of at least $19,000. If your child is currently in college and you are writing checks to the college for tuition or qualified expenses, you should open the 529 plan immediately. You can deposit the college-expense money into the account and immediately write the check to the college. You have just generated an immediate 3.07% rate of return on the deposit, assuming you file a Pennsylvania state income tax return.

Grandparents: Consider the state tax savings available before proceeding to establish and fund a 529 education plan for your grandchildren. If the parents live in a high-income tax state that allows a tax deduction for 529 plan contributions, consider gifting the money directly to the parents and let them establish and fund the 529 plan.

With the recent passing of the SECURE Act 2.0, beginning in 2024, any unused funds in a 529 Plan may now be eligible to be rolled over into a Roth IRA for the 529 Plan beneficiary. To be eligible, the 529 account must have been opened for more than 15 years. The rollover amount cannot exceed the annual IRA contribution limits ($7,000 in 2025) and the rollover amount must have been in the 529 account for at least 5 years. The beneficiary must have had taxable income earned in the year of rollover, but there are not any higher income threshold limitations on the rollover. This is great news for the higher income earners who may otherwise be precluded from making Roth IRA contributions. There is also a $35,000 lifetime maximum rollover limit.

Medical Expenses: The 2025 threshold for deducting out-of-pocket medical expenses on Schedule A must exceed 7.5% of your AGI. Most taxpayers don’t typically incur significant deductible out-of-pocket medical expenses due to medical insurance coverage.

Your net medical expense deduction is linked directly to your AGI. Eligible expenses include health insurance premiums, long-term care premiums (limits apply), prescription drugs, medical, dental and eye care services. If you have incurred higher medical expenses and believe that you will qualify to itemize your deductions in 2025, you should consider paying any last-minute medical, dental, or eye expenses before December 31, 2025. If one spouse has larger medical expenses and lower income than the other, analyze if filing separately reduces your overall tax bill.

If you or a parent is looking to move to an assisted living facility or continuing care community, there is often a large buy-in cost. Much of this cost qualifies for a large medical deduction. This is an overlooked opportunity for many of our clients’ parents. That medical expense could potentially offset the taxes on a Roth IRA conversion.

State and Local Tax (SALT) Deductions: The overall deductible limit for 2025 has increased to $40,000. This limit applies to a combined total that will include state and local income taxes, real estate taxes, sales tax, personal property tax, etc. There is a strategy for increasing this expense in 2025 because of the increase in the cap from $10,000 to $50,000. A large portion of this deduction is typically filled with a combination of income tax withholdings from employee wages and larger real estate tax costs. If you don’t have employee wages but are expecting higher taxable income from other sources of taxable income (i.e., self-employment income, capital gain income/investment income), paying an increased 4^th quarter estimate by December 31, 2025, can generate additional tax savings. As stated above, for those taxpayers whose MAGI is in excess of $500,000 for single and married filing jointly filers, the deduction is reduced by 30% of the excess income over the threshold up to $600,000, wherein it reverts back to $10,000. If you can capitalize on this deduction, we encourage you to accelerate your real estate tax payments and any state and local income tax estimates into 2025, keeping in mind the income thresholds.

Residential Energy Efficient Improvement Credits: If you are considering making residential energy efficient updates to your primary residence, including new exterior doors, exterior windows, furnace, air conditioner, hot water tank, insulation, etc., we encourage our clients to accelerate those expenditures into 2025 vs. 2026. We are not suggesting you make unnecessary purchases. Rather, we would like to see you benefit from the energy efficient home improvement tax credit for those updates that are already contemplated. A taxpayer can earn up to $1,200 in tax credits (not tax deductions) by making those expenditures in 2025 vs. 2026 when the credit is no longer available. In some cases, for heat pumps, biomass stoves or water heaters, the credit can be up to $2,000. We encourage you to consult with your professional tax preparer on the eligible purchases.

Business Owners: The OBBBA made permanent the complicated 20 percent tax deduction (also known as the Section 199A deduction) for eligible business owners such as sole proprietorships, LLCs, S Corporations, Partnerships, and Trusts. The deduction is also available to certain real estate rental property owners. The details of this deduction are beyond the scope of this letter. It is a valuable tax deduction for those who qualify. The business owner will enjoy an extra reduction of taxable income without additional capital outlay. Certain deduction limits are imposed when taxable income exceeds threshold amounts. Keeping taxable income below these thresholds will preserve more of the qualifying deduction.

Utilize Installment Sales: If appropriate, reporting taxable gains using an installment sale will allow you to spread the gain over several years rather than recognizing the entire gain in the year of sale. In many instances, this type of gain is also subject to the 3.8% Medicare surtax on “net investment income” thus managing your AGI can save additional taxes. Keep in mind that Medicare Part B premiums are determined by looking at your tax return from two years prior to the current year. An installment sale may enable you to spread the gain over several years while never crossing the threshold that would trigger increased Medicare premiums in any one year. Opting out of installment sale treatment allows you to recognize the entire gain in the year of sale even though payments would be received over multiple tax years. Consider this option if it’s the appropriate tax strategy. Caution: While the IRS recognizes installment sales, not all states recognize installment sales and require you to report 100% of the gain in the year of sale. Pennsylvania is one of the states who do not recognize installment sales. Installment type sales apply in limited types of transactions. We encourage you to contact your tax advisor on your state’s rules regarding installment sales before making the decision.

Utilize Your Home Office: It may be the right year to switch back to deducting the actual cost of home office expenses as opposed to using the simplified method. If you are one of the many who will be using the standard deduction in 2025, enjoying some tax benefits of deducting a portion of your real estate and mortgage interest as a home office deduction can help ease the pain. Caution: If you sell your home in the future that had a ‘home office’ deduction using the actual cost method, you could be required to recapture depreciation on your home office if you are required to report and pay capital gains taxes on the sale of your home. Please consult your tax professional on this provision before electing the actual cost method.

Reduce Business or Rental Real Estate Income: Make full use of depreciation including bonus depreciation and Section §179 expensing allowances for property and equipment placed in service before the end of the year. You have more control attaining the desired profit or loss level if properly analyzed. The tax law permits full expensing of certain improvements to nonresidential rental property. Improvements such as a full roof replacement on an existing building is eligible for full write-off under Code Section §179. These types of expenditures have historically been subject to much longer depreciation recovery periods. Expensing certain asset purchases under the de minimis expensing rules, while convenient, may end up reducing the Qualified Business Income deduction. Important Note: 100% bonus depreciation deduction was restored for purchases made after 1/19/25. For property acquired before 1/20/25 even if placed in service later, only 40% bonus depreciation applies for 2025 and only 20% bonus depreciation applies for property placed in service in 2026 if acquired before January 20, 2025. You still have the Section 179 depreciation rules which allow maximizing deductions up to $2,500,000 for 2025. And $2,560,000 for 2026 is projected with inflation. Be careful when selling depreciated nonresidential property, as depreciation recapture is pure misery. 

Defer Income and/or Accelerate Expenses: Many taxpayers don’t have much control in choosing whether to defer or accelerate income from year to year. However, the new tax law provides businesses and business owners (including pass-through entities), with incentives and deductions to lower their overall tax costs. Smart timing of income and expenses can be fruitful while poor timing may result in paying a larger tax bill. Being able to estimate income for 2025 and 2026 can help with the decision of either accelerating income before the end of 2025 or deferring the income into 2026. The same is true for deductions. Try and use this flexibility to your advantage. Our goal is to “manage the tax brackets” between the various years to smooth out your income and deductions to pay the overall lowest income tax.

Let’s say for example, your deductions are greater than your income, and you will have a negative taxable income, with a tax liability of zero. This is often the case with seniors who receive tax-free Social Security income. In this case, it would be a good strategy to increase your income from negative taxable income to zero taxable income, because the tax on zero taxable income is still zero! One of the best ways to do this is to do a partial Roth IRA conversion up to the amount that brings your negative taxable income up to zero. Depending on your tax bracket, you may wish to convert even more, especially if you or your children expect to be in a higher income tax bracket in the future. If a Roth conversion is not appropriate or desirable, taking additional retirement account distributions in one year while lowering the amount in the following year may save tax dollars. This strategy is comparable to bunching itemized deductions while using income instead of expenses.

Try to avoid paying unnecessary penalties. If you face an estimated tax shortfall for 2025, consider having the extra tax withheld from sources such as wages, non-suspended regular IRA, and pension distributions. Withheld taxes are treated as if you paid them evenly to the IRS throughout the year. This can make up for any previous underpayments, which could save you penalties. 

Tax Loss Harvesting: We saw the advantages of capital loss harvesting during the 2022 tax year due to the market’s poor performance. This means selling certain investments that will generate a loss—converting them from unrealized losses to realized losses. You can use an unlimited amount of capital losses to offset capital gains. Since the stock market has performed very well in 2025, there may not be many opportunities for “loss harvesting,” but we wanted to bring it to your attention.

For details about tax-loss harvesting, please see Chapter 7, page 103, of The IRA and Retirement Plan Owner’s Guide to Beating the New Death Tax book which you should have already received.

Large long-term capital gain income has often triggered Alternative Minimum Tax (AMT) in past years. On a good note, for the most part AMT has virtually disappeared. For those higher income taxpayers, lowering current year’s investment income by loss harvesting will generate even greater savings. These taxpayers can potentially lower the net investment income tax (the additional 3.8% tax) assessed on net investment income above certain levels.

The Hidden Tax Trap: Larger tax balances due or smaller than expected refunds can often be traced to Capital Gain Distributions. Quite often the bulk of these taxable distributions will not be known until late November and December. These taxable capital gain distributions occur when the mutual fund portfolio managers recognize gains in the managed funds that get passed onto the fund investors. It is very important that you or your investment advisor review your investment portfolio(s) for any “Loss Harvesting” opportunities. You do have until the end of December to sell securities at a loss.

Please note that if you sell an investment with a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security to be able to claim the original loss as a deduction. However, you can buy a similar security to immediately replace the one you sold—perhaps a stock in the same sector. This strategy allows you to maintain your general market position while capitalizing on a tax break.

If you are planning to write off a non-business bad debt, be sure to establish that it is a bona fide debt and document unsuccessful efforts to collect. Form over substance matters in these instances.

Tax Gain Harvesting: Tax Gain Harvesting is the opposite of Tax Loss Harvesting. If you have any highly appreciated stock that you have been holding onto for many years because you did not want to accelerate additional capital gains, this may be the year you want to sell. By selling your highly appreciated stock and offset the capital losses that you harvested, you can minimize your overall ‘net’ capital gain/loss. Remember, you are limited to a net capital loss of $3,000 annually for both joint filers and single filers. Any additional capital losses carry over to the following year indefinitely until they are used. If you should die before the carryforward capital losses are fully utilized, those capital losses are lost. By consulting with both your investment advisor and professional tax preparer, you will be able to determine the best tax strategy for handling your capital gains and losses each year.

Dealing with Stock Loss Carryovers and Roth IRA Conversions in the Year of Death for a Surviving Spouse: From a tax point of view, it is important for the surviving spouse to consult with his/her tax advisor on strategies that would use the deceased spouse’s loss carryovers on the final joint tax return. In addition, this will be the final year that the married couple can file married filing jointly. This is often a great year to make a Roth IRA conversion. But you have to do it before the spouse kicks. We have literally made “death bed” Roth IRA conversions. We have actually gone to a hospital to get a final signature that saved the family a lot of money. The surviving spouse could sell their own securities or other capital assets at a gain to use the deceased spouse’s expiring capital loss carryover. If there is time, evaluating the ill spouse’s portfolio before the date of death may also be helpful.

Zero Percent Tax on Long-Term Capital Gains: If you are in the 10% or 12% tax bracket, the tax rate for long-term capital gains is zero percent! To qualify for the zero-tax rate, your 2025 taxable income cannot exceed $48,350 for single filers and $96,700 for married filing jointly filers.