The less hectic summer season is a good time to consider steps to cut your 2025 tax bill. Here are some planning strategies to consider, assuming our current federal tax regime remains in place through 2025.
Establish a Tax-favored Retirement Plan
If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP plan for yourself, you can contribute up to 20% of your net self-employment income, with a maximum contribution of $70,000 for 2025. If you are employed by your own corporation, up to 25% of your salary can be contributed, with a maximum contribution of $70,000 for 2025.
Other small business retirement plan options include the 401(k) plan, which can be set up for just one person; the cash balance pension plan; and the SIMPLE-IRA, which can be a good choice if your business income is modest. Depending on your circumstances, non-SEP plans may allow bigger deductible contributions.
It Might Not Be Too Late to Establish a Plan and Make a Deductible Contribution for Last Year. The general deadline for setting up a tax-favored retirement plan, such as a SEP or 401(k) plan, is the extended due date of the tax return for the year you or the plan sponsor want to make the initial deductible contribution. For instance, if your business is a sole proprietorship or a single-member LLC that is treated as a sole proprietorship for federal income tax purposes (Schedule C), you have until 10/15/25 to establish a plan and make the initial deductible contribution if you extended your 2024 Form 1040.
However, to make a SIMPLE-IRA contribution for the 2025 tax year, you must have set up the plan by October 1 of last year. So, you might have to wait until this year if the SIMPLE-IRA option is appealing. If so, establish the SIMPLE-IRA and make the initial contribution by October 1 of this year.
Evaluate Your Options. Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.
Take Advantage of Generous Depreciation Tax Breaks
Current federal income tax rules allow generous first-year depreciation write-offs for eligible assets that are placed in service in your business’s current tax year.
Section 179 Deductions. For qualifying property placed in service in tax years beginning in 2025, the maximum allowable Section 179 deduction is a whopping $1.25 million. Most types of personal property used for business are eligible for Section 179 deductions, and off-the-shelf software costs are eligible too.
Section 179 deductions can also be claimed for certain real property expenditures called Qualified Improvement Property (QIP), up to the maximum annual Section 179 deduction allowance ($1.25 million for tax years beginning in 2025). There is no separate Section 179 deduction limit for QIP expenditures, so Section 179 deductions claimed for QIP reduce the maximum Section 179 deduction allowance dollar for dollar.
Note: QIP includes any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service, except for expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework.
Note that Section 179 deductions can be claimed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service after the nonresidential building has been placed in service.
In addition, Section 179 deductions can be claimed for personal property used predominately to furnish lodging or in connection with the furnishing of lodging. Examples of such property would include furniture, kitchen appliances, lawn mowers, and other equipment used in the living quarters of a lodging facility or in connection with a lodging facility such as a hotel, motel, apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.
Warning: Section 179 deductions can’t cause an overall business tax loss, and deductions are phased out if too much qualifying property is placed in service in the tax year. The Section 179 deduction limitation rules can get really tricky if you have an interest in a pass-through business entity (partnership, LLC treated as a partnership for tax purposes, or S corporation or trust). Contact us for details on how the limitations work and whether they will affect you or your business entity.
First-year Bonus Depreciation. 40% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2025. That means your business might be able to write off 40% of the cost of some or all of your 2025 asset additions on this year’s return. However, you should generally write off as much as you can via Section 179 deductions before taking advantage of 40% first-year bonus depreciation.
Legislative Update: Legislators are proposing to restore the 100% bonus depreciation deduction for property placed in service from 1/19/2025 – 2029.
Bottom Line: To take advantage of favorable federal income tax depreciation rules, consider making eligible asset acquisitions between now and year end. Contact us for full details on applicable depreciation rules and the planning opportunities they might open up.
Maximize the Qualified Business Income (QBI) Deduction
The deduction based on QBI from pass-through entities was a key element of 2017 tax reform. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.
Legislative Update: Legislators are actively attempting to extend the favorable tax breaks from the Tax Cuts & Jobs Act (2017) in President Trump’s One Big Beautiful Bill. We’ll keep you informed if this important tax legislation passes.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations.
Note: The QBI deduction is only available to individuals, trusts, and estates.
The QBI deduction also can be claimed for up to 20% of income from qualified REIT dividends and 20% of qualified income from Publicly Traded Partnerships (PTPs). So, the deduction can potentially be a big tax saver.
Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction. For example, claiming big first-year depreciation deductions can reduce QBI and lower your allowable QBI deduction. So, if you can benefit from the deduction, you must be careful in making tax planning moves. We can help you put together strategies that give you the best overall tax results.
Claim 100% Gain Exclusion for Qualified Small Business Stock
There is a 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock for C corporations that was acquired after 9/27/10. QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Contact us if you think you own stock that could qualify for the break.
Also, contact us if you are considering establishing a new corporate business the stock of which might be eligible for the gain exclusion. Advance planning may be required to lock in the exclusion privilege.
Employing Family Members
Employing family members can be a useful strategy to reduce overall tax liability. If the family member is a bona fide employee, the taxpayer can deduct the wages and benefits, including medical benefits, paid to the employee on Schedule C or F (Sole proprietorship or farm) as a business expense, thus reducing the proprietor’s self-employment tax liability. In addition, wages paid to your child under the age of 18 are not subject to federal employment taxes, will be deductible at your marginal tax rate, are taxable at the child’s marginal tax rate, and can be offset by up to $15,000 (your child’s maximum standard deduction for 2025). However, your family member must be a bona fide employee, and basic business practices, such as keeping time reports, filing payroll returns, and basing pay on the actual work performed, should be followed.
State Income Tax Deduction Work-around
The pass-through state income tax deduction essentially allows business owners to deduct state income tax on their business income without limit. This deduction allows a pass-through entity (PTE) to elect to pay the state income tax due on the business income that would otherwise be paid on the owner’s personal tax returns. The federal itemized deduction cap of $10,000 ($5,000 if MFS) for state and local taxes doesn’t apply when a pass-through entity pays state and local tax on its earnings at the entity level. Most states have passed legislation allowing the pass-through tax deduction work-around. Please contact us to determine whether your business is subject to state income taxes in a state that allows the pass-through state income tax deduction election.
Consider Adjusting Your Tax Withholding or Estimated Payments
No taxpayer likes to be surprised with a large tax bill (or a smaller-than-anticipated refund) come tax filing season. In many cases, this occurs because individuals didn’t adjust their tax withholding or estimated payments to account for changes in income. Fortunately, there’s still time to make sure the right amount of federal income tax is being withheld from your paycheck for 2025. If you want more precise results, we would be happy to put together a 2025 tax projection for you.
If you make estimated tax payments throughout the year (if you’re self-employed, for example), we can take a closer look at your tax situation for 2025 to make sure you’re not underpaying or overpaying.
Game the Generous Standard Deduction Allowances
The 2025 standard deduction amounts are $15,000 for singles and those who use married filing separate status, $30,000 for married joint filing couples, and $22,500 for heads of household. If your total annual itemizable deductions for 2025 will be close to your standard deduction amount, consider making enough additional expenditures for itemized deduction items between now and year end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can always claim the standard deduction, which will be increased to account for inflation.
The easiest deductible expense to accelerate is included in the house payment due on January 1. Accelerating that payment into this year will give you 13 months’ worth of interest in 2025. Although 2017 tax reform put stricter limits on itemized deductions for home mortgage interest, you are probably unaffected. Check with us if you are uncertain.
Next up are state and local income and property taxes that are due early next year. Prepaying those bills before year end can decrease your 2025 federal income tax bill because your total itemized deductions will be that much higher. However, 2017 tax reform decreased the maximum amount you can deduct for state and local taxes to $10,000 or $5,000 if you use married filing separate status. So, beware of this limitation.
Legislative Update: Legislators are actively attempting to extend the favorable tax breaks from the Tax Cuts & Jobs Act (2017) in President Trump’s One Big Beautiful Bill. We’ll keep you informed if this important tax legislation passes.
Also, consider making bigger charitable donations this year and smaller ones next year to compensate. That could cause your itemized deductions to exceed your standard deduction this year. Next year, you can always claim the standard deduction. If you don’t have a specific charity or charities that you are comfortable making large donations to, you can contribute to a donor-advised fund instead. Donor-advised funds (also known as charitable gift funds or philanthropic funds) allow you to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund to receive grant requests from charities seeking distributions from the advised fund. Donors can suggest (but not dictate) which grant requests should be honored. You claim the charitable tax deduction in the year you contribute to the donor-advised fund but retain the ability to recommend which charities will benefit for several years. If you have questions or want more information on donor-advised funds, please give us a call.
Carefully Manage Investment Gains and Losses in Taxable Accounts
If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on long-term capital gains recognized in 2025 is only 15% for most individuals, but it can reach the maximum 20% rate at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.
To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from pre-2025 years, selling winners this year will not result in any tax hit. Sheltering net short-term capital gains with capital losses is a sweet deal because net short-term gains would otherwise be taxed at higher ordinary income rates.
What if you have some loser investments that you would like to unload? Biting the bullet and taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains, from other sales this year.
If selling a bunch of losers would cause your capital losses to exceed your capital gains, the result would be a net capital loss for the year. That net capital loss can be used to shelter up to $3,000 ($1,500 if you use married filing separate status) of 2025 ordinary income from salaries, bonuses, self-employment income, interest, royalties, etc. Any excess net capital loss from this year is carried forward to next year and beyond.
In fact, having a capital loss carry over into next year and beyond could turn out to be a pretty good deal. The carryover can be used to shelter both short-term gains and long-term gains recognized next year and beyond. This can give you extra investment flexibility in those years because you won’t have to hold appreciated securities for over a year to get a lower tax rate. The top two federal rates on net short-term capital gains recognized in 2025 are expected to remain at 35% and 37% (plus the 3.8% NIIT, if applicable). So, having a capital loss carryover into next year to shelter short-term gains recognized next year could be a very good thing.
Take Advantage of 0% Tax Rate on Investment Income
The federal income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts is still 0% when the gains and dividends fall within the 0% bracket. For 2025, you may qualify for the 0% bracket if your taxable income is $48,350 or less for single filers, $96,700 or less for married couples filing jointly, or $64,750 or less for heads of household.
While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If so, consider giving them some appreciated stock or mutual fund shares that they can then sell and pay 0% tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient’s ownership period (before the recipient sells) equals at least a year and a day.
Giving away stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient’s 0% rate bracket, they will be federal-income-tax-free.
Warning: If you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the parent’s higher marginal federal income tax rate. That would defeat the purpose. Please contact us if you have questions about exposure to Kiddie Tax.
Explore Gifting Strategies
If you want to make gifts to some favorite relatives, other loved ones, and/or charities, they can be made in conjunction with an overall revamping of your taxable account stock and equity mutual fund portfolios. Gifts should be made according to the following tax-smart principles.
Gifts to Relatives and Other Loved Ones. Don’t give away loser stocks (currently worth less than what you paid for them). Instead, you should sell the shares and take the resulting tax-saving capital loss on your personal return. Then, give the cash sales proceeds to your loved one.
When you gift appreciated stocks instead of selling them yourself, your recipient often benefits from lower tax rates. If your loved ones fall within the 0% federal income tax bracket for long-term capital gains and qualified dividends, they’ll pay no federal tax on gains from shares held for over one year before selling. Importantly, the holding period combines both your ownership time and the recipient’s ownership time when determining if the “more-than-one-year” requirement is met. Even with shares held for a year or less before sale, your recipient will likely pay a lower tax rate on the gains than you would have paid yourself.
Gifts to Charities. The principles for tax-smart gifts to relatives and other loved ones also apply to donations to IRS-approved charities. You should sell loser shares and collect the resulting tax-saving capital losses. Then, you can give the cash sales proceeds to favored charities and claim the resulting tax-saving charitable deduction (assuming you itemize deductions on your tax return). Following this strategy delivers a double tax benefit: tax-saving capital losses plus a deductible charitable donation.
On the other hand, you should donate winner shares instead of giving away cash. Why? Because donations of publicly traded shares that you have owned over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift (again, assuming you itemize). Plus, when you donate winner shares, you escape any capital gains taxes on those shares. So, this idea is another double tax-saver: you avoid capital gains taxes while getting a tax-saving donation deduction (assuming you itemize). Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing anything to the IRS.
If you are age 70½ or older, consider a direct transfer from your IRA to a qualified charity [known as a Qualified Charitable Distribution (QCD)]. While you will not be able to claim a charitable donation for the amount transferred to the charity, the QCD does count toward your Required Minimum Distribution (RMD). If you don’t itemize, that’s clearly better than taking a fully taxable RMD and then donating the amount to charity with no corresponding deduction. Even if you do itemize and would be able to deduct the full amount transferred to the charity, the QCD does not increase your Adjusted Gross Income (AGI), while a RMD would. Keeping your AGI low can decrease the amount of your Social Security benefits that are taxable, as well as avoid or minimize the phaseout of other favorable tax provisions based on AGI. To get a QCD completed by year-end, you should initiate the transfer before December 31. Talk to your IRA custodian.
Convert Traditional IRAs into Roth Accounts
The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. If that turns out to be true, the current tax hit from a conversion done this year could be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings. In effect, a Roth IRA can insure part or all of your retirement savings against future tax rate increases.
Take Advantage of Principal Residence Gain Exclusion Break
Home prices have cooled off in many areas, but many homeowners are still sitting on substantial unrealized gains. Gains of up to $500,000 from the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns. For qualifying unmarried individuals and married individuals who file separate returns, the gain exclusion limit is $250,000. To qualify for the gain exclusion break, you must’ve owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date. You’ll definitely want to take these rules into consideration if you’re planning on selling your home in today’s real estate environment.
Watch Out for the AMT
2017 tax reform significantly reduced the odds that you will owe AMT by significantly increasing the AMT exemption amounts and the income levels at which those exemptions are phased out. Even if you still owe AMT, you will probably owe considerably less than before the 2017 tax reform bill. Nevertheless, it’s still critical to evaluate year-end tax planning strategies in light of the AMT rules. Because the AMT rules are complicated, you may want some assistance. We stand ready to help.
Don’t Overlook Estate Planning
The unified federal estate and gift tax exemption for 2025 is a historically huge $13.99 million, or effectively $27.98 million for married couples. Even if these exemptions may mean you are not currently close to being exposed to the federal estate tax, your estate plan may need updating to reflect the current tax regime. Also, you may need to make some changes for reasons that have nothing to do with taxes, such as various life changes.
Tax rules, as of the date of this letter, require that beginning in 2026 the unified federal estate and gift tax exemption falls back to what it was before 2017 tax reform with a cumulative inflation adjustment for 2018–2025. That might put it in the $7 million to $8 million range, depending on what inflation turns out to be through 2025.
Legislative Update: Legislators are proposing to increase the exemption to $15 million (per person) and make the exemption permanent.
Conclusion
This letter highlights proactive summer tax planning opportunities that can help reduce your 2025 tax bill. Acting now gives you more flexibility and time to optimize your strategies. If you have questions about any of the ideas discussed here or would like personalized guidance, please contact us. We are here to help you develop a tax planning approach that works all year long and delivers results.
Very truly yours,
Abeles and Hoffman, P.C.
Click here to download the 2025 Summer Tax Planning Letter!
