Year-End Tax Planning Strategies for High Earners

High earners face unique tax challenges and opportunities, especially as tax laws evolve. Proactive year-end planning can help you minimize your tax liability, optimize your financial position, and avoid costly mistakes. Here are the most effective strategies and important updates for 2025:

Key Strategies for High Earners

1. Income Deferral

Consider postponing bonuses, self-employment income, or capital gains to the following year if you expect to be in a lower tax bracket or if tax rates are expected to decrease. This can reduce your current year’s taxable income and overall tax liability.

2. Acceleration of Deductions

Accelerate deductible expenses—such as state and local taxes, mortgage interest, or charitable contributions—into the current year. Bunching deductions into a high-income year can maximize their value.

3. Charitable Giving

Make charitable contributions before year-end, especially with appreciated securities or through donor-advised funds. Donating appreciated assets lets you avoid capital gains tax and claim a deduction for the fair market value.

4. Maximize Retirement Contributions

Contribute the maximum allowable amounts to retirement accounts such as 401(k)s, IRAs, and SEP or Solo 401(k) plans. These contributions are generally tax-deductible and help reduce your taxable income.

5. Investment Strategies

Harvest tax losses by selling investments that have declined in value to offset capital gains. Consider deferring the sale of appreciated assets to a future year if you expect to be in a lower tax bracket.

6. Bunching Deductions

“Bunch” itemized deductions into one year to exceed the standard deduction, then take the standard deduction in alternate years to maximize tax benefits.

7. Review AMT Exposure

Analyze the impact of the Alternative Minimum Tax (AMT) before accelerating deductions or income, as certain items are treated differently under the AMT.

8. Health Savings Account (HSA) Contributions

If eligible, contribute to an HSA before year-end. HSA contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.

9. Income Shifting to Family Members

Gift income-producing assets to family members in lower tax brackets, where appropriate and within gift tax limits, to reduce the overall family tax burden.

Recent Tax Law Changes Impacting High Earners (2025)

The 2025 Tax Act—commonly known as the "big beautiful" bill or OBBB—made several important changes that affect high earners. Here’s what you need to know:

1. Individual Income Tax Rates and Brackets

The Act makes permanent the lower individual tax rates and expanded brackets introduced by the 2017 Tax Cuts and Jobs Act (TCJA), including the top marginal rate of 37% for high earners. The "marriage penalty" relief is also made permanent, except for the top bracket.

2. Capital Gains and Qualified Dividends

The TCJA’s capital gains and qualified dividend tax rate structure (0%, 15%, and 20%) is made permanent, along with the breakpoints at which these rates apply.

3. Deductions and Limitations

  • The State and Local Tax (SALT) deduction cap is increased from $10,000 to $40,000 for 2025, with further increases and inflation adjustments through 2029. However, the deduction is phased out for taxpayers with modified adjusted gross income (MAGI) over $500,000 in 2025, and the deduction cannot be reduced below $10,000. The cap reverts to $10,000 in 2030.

  • The Pease limitation on itemized deductions is permanently repealed. Instead, a new 2/37 reduction applies to itemized deductions for income above the 37% bracket threshold, but the qualified business income deduction (Section 199A) is excluded from this limitation.

  • A new 0.5% of AGI floor is imposed on charitable deductions, and the 60%-of-AGI ceiling for certain cash gifts is made permanent.

  • The $750,000 cap on mortgage interest deduction is made permanent.

  • The suspension of miscellaneous itemized deductions is made permanent, except for educator expenses.

4. Estate and Gift Tax

The basic exclusion amount for estate and gift tax increases to $15 million (from $10 million), indexed for inflation after 2025. This higher exemption is permanent, providing significant planning opportunities for high-net-worth individuals.

5. Alternative Minimum Tax (AMT)

The individual AMT exemption amounts and phaseout thresholds are permanently increased, with the phaseout threshold set at $1,000,000 for joint filers in 2026 (indexed for inflation). The phase-out rate for higher-income taxpayers increases from 25% to 50%.

6. Other Notable Provisions

  • The limitation on excess business losses for non-corporate taxpayers is made permanent, with inflation adjustments.

  • The threshold for Form 1099 reporting is increased from $600 to $2,000, indexed for inflation starting in 2027.

  • The personal exemption deduction is permanently eliminated for most taxpayers.

Summary:

The 2025 Tax Act (OBBB) permanently extends the lower top individual tax rate of 37%, maintains favorable capital gains rates, increases the estate and gift tax exemption to $15 million (indexed), raises the SALT deduction cap to $40,000 (with phaseouts for high earners), repeals the Pease limitation, and imposes new limits on charitable and other deductions. High earners should review their tax planning strategies in light of these significant changes.

Best Practices and Common Pitfalls

Best Practices:

  • Monitor income thresholds that trigger higher tax rates and surcharges.

  • Defer income and accelerate deductions when appropriate.

  • Harvest capital losses to offset gains.

  • Maximize retirement contributions and charitable giving.

  • Ensure sufficient withholding or estimated tax payments to avoid penalties.

Common Pitfalls:

  • Ignoring phase-outs of deductions and credits as income rises.

  • Acting prematurely on potential tax law changes.

  • Failing to separate business and personal finances.

  • Missing deadlines for contributions or payments.

  • Neglecting the impact of state taxes.

Summary

Year-end tax planning for high earners is more important than ever in light of recent tax law changes. By deferring income, accelerating deductions, making strategic charitable gifts, maximizing retirement contributions, and employing smart investment strategies, you can reduce your tax liability and optimize your financial future. Avoid common pitfalls by staying informed, planning ahead, and coordinating with your tax advisor.

If you have questions or want to discuss your personalized year-end tax strategy, contact our team today.