By: AnnaMarie Mock, CFP®
Strategies to Reduce Your 2025 Tax Bill and Strengthen Your Financial Plan
As the end of the year approaches, now is the time to take stock of your finances and look for ways to reduce your 2025 tax liability. Smart, proactive tax planning before December 31 can help you retain more of your earnings, accelerate your long-term goals, and ensure your financial plan operates efficiently. Whether your income comes from salary, self-employment, or investments, here are key strategies to consider as you wrap up the year.
1. Maximize Tax-Deferred Growth Opportunities
One of the most effective ways to reduce your taxable income is by contributing to accounts that offer tax-deferred growth. These vehicles allow your money to compound over time without being reduced by annual taxes on earnings.
Retirement accounts
Review your contribution level before year-end if you have access to a 401(k), 403(b), or similar employer-sponsored plan. For 2025, employees can contribute up to $23,000 to their 401(k) or 403(b), with an additional $7,500 catch-up contribution if you're 50 or older. Increasing your contribution—even by a few percentage points in your final pay periods—can reduce your taxable income while boosting your retirement savings.
If you're self-employed, consider a SEP IRA or Solo 401(k). These plans allow significant deductible contributions based on your business income, and contributions can often be made up to your tax-filing deadline (plus extensions). However, the plan itself typically must be established by year-end. If you’re self-employed, consider a SEP IRA or Solo 401(k). These plans allow significant deductible contributions based on your business income, and contributions can often be made up to your tax-filing deadline (plus extensions). However, the plan itself typically must be established by year-end.
Health Savings Accounts (HSAs)
If enrolled in a high-deductible health plan, you can contribute up to $4,300 for individuals or $8,550 for families in 2025 (plus an additional $1,000 if age 55+). HSAs are unique because they offer triple tax advantages: contributions are tax-deductible, growth is tax-free, and qualified medical expense withdrawals are tax-free.
Education savings
Contributions to 529 college savings plans aren't deductible on your federal return, but many states offer tax benefits. Plus, earnings grow tax-free when used for qualified education expenses. If you're saving for a child or grandchild's education, making contributions before year-end may provide a state tax benefit. Contributions to 529 college savings plans aren’t deductible on your federal return, but many states offer tax benefits. Plus, earnings grow tax-free when used for qualified education expenses. If you’re saving for a child or grandchild’s education, making contributions before year-end may provide a state tax benefit.
2. Harvest Investment Losses
Market volatility can be uncomfortable, but it often creates valuable opportunities for tax planning. One of the most effective tools available to investors before year-end is tax-loss harvesting—the process of selling investments that have declined in value to offset realized capital gains elsewhere in your portfolio. This strategy can help reduce your tax bill today while strengthening your long-term after-tax returns when managed thoughtfully.
Tax-loss harvesting is particularly effective in years when markets have been uneven—some areas of your portfolio may have appreciated significantly, while others lagged. By realizing losses in underperforming positions, you can reduce the tax impact of gains realized through rebalancing, trimming concentrated holdings, or diversifying away from a single stock position.
A few important reminders:
Capital losses can offset capital gains dollar for dollar.
If losses exceed gains, you can deduct up to $3,000 ($1,500 if married filing separately) against ordinary income.
Unused losses can be carried forward indefinitely to offset future gains.
To preserve the tax benefit of a harvested loss, avoiding the wash-sale rule is critical. This IRS rule disallows a loss deduction if you buy a "substantially identical" investment within 30 days before or after the sale. The rule applies to purchases made in retirement accounts, such as IRAs or 401(k) plans. The simplest way to comply is to use an alternative security that provides similar exposure—for example, selling one large-cap ETF a IRAs or 401(k)s. The simplest way to comply is to use an alternative security that provides similar exposure—for example, selling one large-cap ETF and buying another that tracks a different but comparable index.nd buying anothat tracks a different but comparable index.
3. Consider the Timing of Income and Deductions
Tax planning isn't only about what you earn or give but also about when those actions occur. The timing of income and deductions can have a meaningful impact on your overall tax bill, especially if your income or expenses fluctuate yearly. By thoughtfully managing when income is received and when deductions are claimed, you can smooth out taxable income and reduce your effective tax rate over time. Tax planning isn’t only about what you earn or give but also about when those actions occur. The timing of income and deductions can have a meaningful impact on your overall tax bill, especially if your income or expenses fluctuate yearly. By thoughtfully managing when income is received and when deductions are claimed, you can smooth out taxable income and reduce your effective tax rate over time.
If you expect to be in the same or a lower tax bracket next year, you may be able to defer income into 2026 or accelerate deductions into 2025 to reduce your current tax bill. Common strategies include:
Deferring year-end bonuses or consulting income (if your employer or clients permit).
Roth Conversion will accelerate income and taxes in the year of the conversion, but should lower future required minimum distributions and build tax-free assets.
Prepaying deductible expenses such as property taxes, mortgage interest, or charitable contributions before year-end.
Bunching deductions—for example, making two years' worth of charitable donations in one year to exceed the standard deduction threshold. Bunching deductions—for example, making two years’ worth of charitable donations in one year to exceed the standard deduction threshold.
The goal of income and deduction timing isn't just to reduce taxes in a single year—it's to manage your lifetime tax exposure. The best approach depends on your current income, expected future income, and the broader context of your financial plan. Sometimes, accelerating income into a lower-income year can be just as valuable as deferring it; other times, front-loading deductions provides the most significant benefit.
4. Use Charitable Giving to Reduce Taxes
Charitable giving can be both personally rewarding and financially efficient. If you itemize deductions, gifts made to qualified charities before December 31 can reduce your taxable income for 2025.
Cash and check donations are the simplest way to give, but there are more strategic methods that can amplify your impact:
Donate appreciated stock or mutual funds. By giving securities you've held for over a year, you can avoid paying capital gains tax on the appreciation while receiving a charitable deduction for the fair market value. This strategy can be compelling in years when markets have performed well. In years when markets have performed well.
Consider a Donor-Advised Fund (DAF). A DAF allows you to make a large, deductible gift this year—potentially bunching several years of giving—while distributing the funds to charities over time. This strategy can be a flexible way to align tax benefits with your long-term philanthropic goals.
Qualified Charitable Distributions (QCDs). If you're 70½ or older, you can direct up to $100,000 per year from your IRA to a qualified charity. The distribution counts toward your Required Minimum Distribution (RMD) but is excluded from taxable income—a win-win for retirees who wish to make a charitable gift.
The recently passed One Big Beautiful Bill Act introduces several significant changes to charitable giving rules, effective in 2026. Under the new law, taxpayers who don't itemize can claim up to $1,000 for individuals or $2,000 for married couples filing jointly—for cash gifts to qualified charities (excluding donor-advised funds).
For those who itemize, the deduction will now apply only to contributions exceeding 0.5% of adjusted gross income (AGI), and its value will be capped at a 35% tax benefit, even for those in higher tax brackets.
For 2025, it may be advantageous to accelerate charitable gifts under the current, more favorable deduction rules—particularly if you typically itemize or plan to make a large donation to a donor-advised fund or charitable foundation. Reviewing your giving strategy before December 31 could help maximize your impact and tax benefit before these new limitations take effect.
5. Review Your Withholding and Estimated Payments
Even the most carefully planned tax strategies can lose effectiveness if your withholding and estimated payments aren't aligned with your tax situation. As the year-end approaches, it's worth reviewing how much you've paid toward your 2025 federal and state taxes so far. Doing so can help you avoid underpayment penalties and large unexpected balances due at tax time—while keeping more of your cash working efficiently throughout the year. Large unexpected balances due at tax time—while keeping more of your cash working efficiently throughout the year.
This review is critical if you've experienced any changes in income or deductions during the year. For example:
You or your spouse changed jobs or had a significant raise.
You earned substantial investment income, such as dividends, interest, or capital gains.
You sold a business, property, or other asset that has appreciated in value.
You started or grew a self-employed business.
You adjusted retirement account withdrawals or started Required Minimum Distributions (RMDs).
You increased charitable giving or other itemized deductions.
These situations can shift your tax liability in ways that aren't automatically reflected in your paycheck withholding or quarterly estimated payments.
6. Coordinate With Your Advisor and Tax Professional
While year-end tax planning can seem overwhelming, you don't have to navigate it alone. The most effective strategies come from coordination between you, your financial advisor, and your tax professional. Each decision you make, from charitable giving and investment rebalancing to income timing and retirement plan contributions, affects the others. Our role as your advisor is to help you see the whole picture—so your strategies work together to reduce taxes today and strengthen your long-term plan. Between you, your financial advisor, and your tax professional. Each decision you make, from charitable giving and investment rebalancing to income timing and retirement plan contributions, affects the others. Our role as your advisor is to help you see the full picture—so your strategies work together to reduce taxes today and strengthen your long-term plan.
Tax planning isn't just a once-a-year exercise—it's part of an ongoing, disciplined approach to managing your financial life.
The Bottom Line
The weeks leading up to year-end offer a valuable opportunity to take control of your tax picture. By combining smart saving strategies, charitable giving, and careful timing of income and deductions, you can lower your 2025 tax bill and strengthen your long-term financial foundation.
Proactive tax planning is about more than minimizing taxes—it's about aligning your resources with your goals. A thoughtful year-end review can ensure you enter 2026 positioned for financial success. Proactive tax planning is about more than minimizing taxes—it’s about aligning your resources with your goals. A thoughtful year-end review can ensure you enter 2026 positioned for financial success.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).