Here Are Things You Can Do This Year to Trim Your Tax Bill Next Year

Consider ways to trim your 2025 income before the year winds down—you may thank yourself come tax-filing season.

Deferring or avoiding income can prevent you from creeping into the next higher tax bracket, and this year there is an especially enticing reason for higher earners to explore income-reducing strategies: eligibility for the new $40,000 cap on state and local taxes.

This year’s new tax bill, enacted in July, established a $500,000 income cut-off for singles and couples filing taxes jointly to qualify for a new $40,000 cap on deductions for state and local taxes, up from a $10,000 cap.

The higher cap, effective on 2025 taxes, begins phasing out at a rate of 30% on every dollar of income over that threshold, and drops to $10,000 for people earning more than $600,000.

If, say, your income as a married couple is $550,000, the maximum $40,000 cap would be reduced by $15,000 (30% of $50,000). The most you would be able to deduct is $25,000.

Depending on your income, there may be other thresholds for deductions and credits to plan your income around.

For example, the phaseout for the $2,200 child tax credit begins at $400,000 for joint filers and $200,000 for all other filers; and a $2,500 American Opportunity Tax Credit for college costs begins dwindling at $80,000 for single earners and $160,000 for joint filers.

“The key is to know where your adjusted gross income is going to end up so you can think about how to improve your tax situation,” says Rob Williams, managing director and head of wealth management research at Charles Schwab.

While business owners tend to have the most flexibility to manipulate their income, consider the following income-reducing moves available to wage earners:

Avoid a big mutual fund year-end gains payout

Many mutual funds distribute net realized capital gains at the end of the year to all investors, no matter how long they have been in the fund.

Distributions are taxable if you hold your fund in a taxable account, even if you reinvest them. Distributions of short-term gains, which are those held for one year or less, are taxable at ordinary income-tax rates of up to 37%, and long-term gains are taxed at capital-gains tax rates up to 20%.

“But you don’t have to take a distribution on the chin,” says Brian Schultz, a tax partner at Plante Moran.

Funds announce the amount of their distributions before they take place. If your tax on a distribution would be greater than the tax you would pay on your gains if you sell out of fund, then consider selling out before the distribution, Schultz says.

For example, if you have $500,000 in a fund that announces a 5% distribution of long-term capital gains, you can figure your distribution will be $25,000 and, if you are in the top tax bracket, you will owe 23.8% or $5,950 in taxes. That assumes a 20% capital gains tax rate plus the 3.8% net investment income tax.

If you only have, say, $5,000 of personal long-term gains in the fund and you sell before the distribution, you would owe significantly less on your gains: $1,190.

After the distribution, you can reinvest in the fund so you aren’t sitting on the sidelines if the fund’s value rises, he says.

Max out on pretax contributions

Max out on pretax contributions not only for your employer-sponsored retirement plan, but also your health savings account (HSAs), if you are eligible for one.

The maximum you can contribute to a 401(k), 403(b) or 457(b) plan this year is $23,500 or $31,000 if you are age 50 or older. If you are between the ages of 60 and 63, you can contribute a maximum of $34,750.

HSAs are available to taxpayers who have a high-deductible health plan. Contributions are pretax as long as you make them through a payroll deduction.

“HSAs are underused in tax planning. They’re not just a medical expense piggy bank,” Schultz says.

Any amount you don’t use for medical expenses can be invested, grow tax deferred and tapped for non medical expenses once you are over age 65.

Contribution limits for 2025 are $8,550 for a family plan and $4,300 for an individual plan.

Gift with a qualified charitable distribution

If you’re 73 or older and have an IRA, required minimum distributions (RMDs) can significantly inflate your income.

But you can offset that income by making a charitable gift, called a qualified charitable distribution (QCD), from your IRA. The QCD counts toward your required distribution.

You don’t get a tax deduction for the gift, but you don’t have to claim it as income.

“If you send it directly from your IRA to a charity, it never comes on your books as income,” says Rob Burnette, an investment advisor and tax preparer at Outlook Financial Center.

“With one client we took $50,000 of income off the table, so less of his Social Security is taxed and he’s in a lower tax bracket,” Burnette says.

Bunch tax deductible gifts into 2025

By accelerating future years’ gifting into 2025, you can claim a bigger deduction than usual for this year, thereby reducing taxable income. If you make your multi-year contribution to a donor-advised fund, you can take an up-front deduction and distribute your gifts to charities over future years.

There’s another reason to bunch future contributions into 2025: You will get more value out of your deduction in 2025 than in future years due to new limits on charitable deductions enacted by this year’s tax bill.

Starting next year, taxpayers can only itemize deductions for charitable gifts that exceed 0.5% of adjusted gross income, and there will be a new 35% cap on the value of charitable deductions.”

“For a high wage earner with a significant amount of ordinary income who is thinking how to best manage tax liability, accelerating charitable contributions into 2025 could be a huge benefit,” Schultz says. “A lot of people have gains in their portfolios. If you rebalance, instead of selling stock, consider donating some of those shares.”

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