To Our Clients and Friends:
As we head towards the end of 2025, under the newly enacted One Big Beautiful Bill (OB3), a number of key provisions and extensions create significant opportunities for both individuals and businesses to reduce taxes and strengthen their financial positions. This letter provides an overview of important planning strategies, organized around income, investments, deductions, retirement, and estate considerations. The following guidance aims to help you make informed, proactive decisions before December 31, 2025.
Legislative Update: OB3 raises the State and Local Tax (SALT) deduction cap to $40,000 on a joint return, ($20,000 MFS), extends 100% bonus depreciation for qualifying assets, maintains the 20% Qualified Business Income (QBI) deduction, and expands certain retirement contribution limits to $70,000 per participant.
Retirement Planning
Retirement planning remains one of the most effective ways to manage taxable income. In 2025, maximum 401(k) and profit-sharing contributions rise to $70,000 per participant, with catch-ups still available for those age 50 or older. For self-employed taxpayers, Simplified Employee Pension (SEP) and Solo 401(k) plans remain top tools for large deferrals.
Partial Roth conversions continue to be powerful where 2025 marginal rates are lower than expected future rates. Converting incrementally avoids bracket creep and supports long-term tax-free compounding.
Note: Taxpayers with filing extensions will still have until October 15, 2026, to establish and fund certain 2025 retirement plans—verify eligibility with your advisor.
Caution: Large conversions can raise Adjusted Gross Income (AGI) and affect Medicare IRMAA, Net Investment Income Tax (NIIT), and child tax credit phaseouts.
Calibrate pre-tax and Roth contributions to smooth lifetime tax exposure and maximize after tax wealth.
Income Timing and Cash Flow Management
Traditional timing rules still apply: if you expect lower income in 2026, defer income and accelerate deductions into 2025; if you expect higher income in 2026, accelerate income and delay deductions. OB3’s higher State and Local Tax (SALT) deduction cap increases the value of paying state income and property taxes by December 31, 2025.
The cap on the deduction for state and local taxes is temporarily increased to $40,000 ($20,000 for married filing separately) for 2025 through 2029, with a phase-down for higher incomes. The cap reverts to $10,000 after 2029. This may affect whether it is beneficial for you to itemize deductions and your overall tax planning.
Depreciation, Equipment, and Business Investment
Cost recovery rules are especially favorable for 2025. Section 179 allows immediate expensing up to $2.5 million of qualifying property (phased out after $4 million placed in service). Bonus depreciation provides a 100% write‑off for qualifying new or used assets acquired after January 19, 2025. Qualified Improvement Property (QIP) interior improvements to nonresidential buildings remain eligible, along with certain roofs, HVAC, fire protection, and security systems placed in service after the building is first placed in service.
Note: Prioritize Section 179 for maximum control over specific assets and basis allocation; use bonus depreciation to sweep up remaining cost. Coordinate depreciation elections with qualified business income (QBI) and entity-level income to prevent unintended phaseouts.
Warning: Section 179 cannot create an overall business loss and phases out with large purchases; bonus depreciation deductions are affected by business use percentages so track business use carefully.
First-year Bonus Depreciation. For assets acquired between 1/1/25, and 1/19/25, bonus depreciation is limited to 40%. However, for assets acquired after 1/19/25, full (100%) bonus is available for qualified new and used property that is acquired and placed in service in calendar-year 2025. Depending on timing, your business might be able to write off 100% 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 using Section 179 deductions for assets acquired in January 2025 subject to the 40% first-year bonus depreciation limitations, because, if no limits apply, Section 179 expensing results in a 100% write-off. Qualified property includes personal property, some real property, such as QIP (see above), and land improvements.
With 100% bonus depreciation remaining fully available for the foreseeable future, barring any legislative changes, now is an ideal time to think beyond year-end purchases and begin long-term planning for asset acquisitions. Section 179 expensing and bonus depreciation can significantly reduce taxable income, and the ability to rely on full bonus depreciation in future years opens the door to multi-year tax planning strategies.
Research and Experimental (R&E) Expenses
Domestic R&E expenditures are now immediately deductible for tax years beginning after Dec. 31, 2024. Foreign R&E expenditures must still be capitalized and amortized over 15 years. Certain taxpayers, including many small businesses, may use transition relief to deduct remaining unamortized domestic R&E from 2022–2024. We can help you review your R&E activities to confirm eligibility, coordinate any Sec. 280C interactions, and time elections to maximize the benefit.
Qualified Business Income (QBI) and Entity Planning
The 20% QBI deduction remains a cornerstone benefit for pass‑through owners, subject to taxable income thresholds, W‑2 wage limits, and the unadjusted cost basis of qualified property (QP). High‑income service businesses may see limits phase in; non‑service businesses often benefit fully with adequate wages and/or QP. Planning levers include bonus timing, reasonable compensation for S‑corporation owners, and the sequencing of Section 179 and bonus depreciation, which can reduce QBI if overused. Model QBI with wages, depreciation, and business structure to preserve the deduction and manage overall taxable income.
Note: Review S-corporation salaries to ensure reasonable compensation because overly low wages may trigger IRS scrutiny, while overly high wages reduce the QBI benefit.
Investments, Capital Gains, and Loss Harvesting
Review taxable portfolios for opportunities to harvest losses against realized gains plans up to $3,000 of ordinary income ($1,500 MFS). Long‑term capital gains continue to be taxed at preferential rates (0%, 15%, 20%) with NIIT potentially applying at higher income levels. Consider gifting appreciated securities to family members in lower brackets or donating them to charities to avoid capital gains tax while securing a deduction.
Warning: The wash sale rule disallows a loss if you repurchase substantially identical securities within 30 days before/after the sale.
Nontax issues must be considered when deciding to sell or hold a security. If you have stock that has fallen in value, but you think will recover, you might want to keep it rather than trigger the capital loss. If, after considering all factors, you decide to take some capital gains and/or losses to minimize your 2025 taxes, make sure your investment portfolio is still allocated to the types of investments you want based on your investment objectives. You may have to rebalance your portfolio. When you do, be sure to consider investment assets held in taxable brokerage accounts as well as those held in tax-advantaged accounts, such as IRAs and 401(k) plans.
The 2025 Act expanded the gain exclusion rules for Qualified Small Business Stock (QSBS) making the
C corporation an attractive choice of entity, especially for businesses in the manufacturing and production industries or for businesses that sell tangible personal property. For stock issued on or after 7/4/25, 50% gain exclusion is available when the stock is held for at least three years, 75% gain exclusion for stock held at least four years, with 100% gain exclusion for stock held five or more years. For stock issued after 9/27/10 but before 7/4/25, QSBC shares must be held for more than five years to be eligible for the gain exclusion.
Charitable Contribution Planning
With changes coming in 2026 to the charitable deduction, it will be important to review your plans to discuss the best timing and structure for your charitable giving. There are many tax planning strategies we can discuss with you about charitable giving.
- Consider donating appreciated assets that have been held for more than one year, rather than cash. You benefit from a deduction for the fair market value (FMV) of your appreciated stock and avoid taxes on capital gains from the appreciation.
- Opening and funding a donor advised fund (DAF) is appealing to many as it allows for a tax-deductible gift in the current year and the ability to distribute those funds to charities over multiple years.
- Qualified charitable distributions (QCDs) are another beneficial option for those over age 70½ who do not typically itemize on their tax returns. A QCD counts toward your required minimum distribution (RMD) and is excluded from taxable income, especially valuable if you do not itemize deductions.
It is essential to maintain proper documentation of all donations, including obtaining a letter from the charity confirming that no goods or services were provided in exchange for donations of $250 or more.
To get a QCD completed by year-end, you should initiate the transfer before December 31. Talk to your IRA custodian about making the transfer no later than December 2025.
Bottom Line: Coordinate charitable timing with SALT payments and standard vs itemized thresholds for maximum leverage in 2025.
Analysis of your financial statements
Look at where your business is positioned with income and expenses to close out the tax year. This may mean getting caught up on your bookkeeping to have a better picture of where your tax situation stands. This is a critical part of the tax planning process. This is also the time to project any remaining income and expenses that may be received or owed before the end of the year. We can help you analyze your financial statements for tax savings and planning opportunities.
Estate, Gifting, and Wealth Transfer
The unified federal estate and gift tax exemption is $13.99 million per individual in 2025 ($27.98 million for married couples), with a scheduled increase to $15 million in 2026 ($30 million for a married couple). Annual exclusion gifts of $19,000 per recipient can reduce future estate size while shifting income on transferred assets to lower brackets. Trust strategies and family limited partnerships can centralize management and support multigenerational planning. Individuals with estates below these new lofty levels may wish to consider upstream gifting, a strategy to provide a tax basis step-up to their heirs when the circumstances are workable. We are available to discuss at your convenience.
Warning: Large lifetime transfers should account for basis planning gifting low basis assets shifts built‑in gain to donees; compare to a potential step up at death.
Bottom Line: Use annual exclusions and opportunistic lifetime transfers to de‑risk future estate exposure while preserving income tax efficiency.
Education and Health Savings Coordination
Coordinate 529 plan contributions with expected distributions to minimize taxable earnings recognition and maximize state‑level benefits where available. For high‑deductible health plan participants, maximize Health Savings Account (HSA) contributions for triple tax benefits: deductible (or pre‑tax) contributions, tax‑free growth, and tax‑free withdrawals for qualified medical expenses. Consider prefunding early‑year medical costs with FSA/HSA planning to smooth cash flow and leverage pre‑tax dollars.
Note: FSAs may offer a carryover or a grace period—but not both; review plan rules to avoid forfeiting 2025 balances.
Bottom Line: Align 529, HSA, and FSA decisions with broader cash‑flow and deduction timing to amplify overall tax efficiency.
New Children’s Savings – Trump Accounts
For children born between 2025 and 2028, OB3 introduces a new custodial savings vehicle (the ‘Trump Account’) with a onetime $1,000 federal contribution and up to $5,000 in annual after‑tax contributions. These accounts can complement 529 plans by broadening long‑term savings options for families.
Note: Ensure the child has a Social Security number and follow IRS election procedures to claim the $1,000 contribution when available. Open accounts promptly for eligible children to capture the federal contribution and begin tax‑advantaged compounding.
IRS Compliance and Audit Readiness
Heightened IRS data analytics now flag inconsistencies across K-1s, W-2s, and Form 1099s. The agency has increased correspondence audits targeting itemized deductions, credits, and business expense substantiation.
Recommendations:
– Maintain digital copies of receipts and mileage logs.
– Retain contemporaneous documentation for charitable gifts, property valuations, and major deductions.
– Use accounting systems that timestamp and archive transactions for five years.
Warning: Failure to substantiate deductions can trigger accuracy-related penalties up to 20% of underpayment.
Treat recordkeeping as part of tax strategy—organized documentation is the best audit defense.
Summary of Key Action Steps (Before December 31, 2025)
- Review projected 2025 and 2026 income to determine acceleration or deferral strategies.
- Maximize retirement plan contributions and evaluate partial Roth conversions.
- Place qualifying business assets in service before year-end to capture bonus depreciation.
- Optimize QBI deduction through proper wage and depreciation planning.
- Harvest investment losses and gift appreciated assets strategically.
- Bunch charitable donations via donor-advised funds or QCDs.
- Leverage the expanded SALT deduction cap where appropriate.
- Review digital records and ensure compliance readiness.
- Complete home energy upgrades before December 31, 2025.
- Utilize annual gift exclusions and review lifetime transfer goals.
Conclusion
This letter outlines some of 2025’s most impactful tax planning strategies under the One Big Beautiful Bill (OB3). Reviewing your personal and business situations before year-end can yield significant savings. Please contact us if you would like a personalized consultation.
Very truly yours,
Click here to download the 2025 Year-End Tax Planning Letter.
