Final 2025 Year-End Tax Planning
The year 2025 is coming to a close, and there are still a few opportunities for year-end tax planning. It’s important to note that state and local tax deductions (SALT) are set to increase significantly. President Trump’s tax bill, passed by Congress in July, raises the annual deduction limit from $10,000 to $30,000. As a result, many individuals living in high-tax states such as New Jersey, New York, and California will now have the option to utilize the standard deduction.
Please note that the increased standard deduction lowers your taxable income but does not affect your adjusted gross income (AGI). As a result, many deductions related to AGI, as well as certain additional taxes like the Medicare surtax and the Obama 3.8% surtax on investment income, are calculated based on AGI rather than taxable income.
Qualified Business Income Deduction
The Section 199A deduction applies to pass-through entities, including LLCs taxed as sole proprietorships and partnerships. This deduction allows owners to deduct up to 20% of their business income, based on wages paid to employees. It was introduced as part of the 2017 Trump tax reform.
However, this deduction is available only to certain businesses and is subject to an income limit based on Adjusted Gross Income (AGI), not taxable income. For joint filers, the AGI limit for the deduction is $494,600 in 2025, which increases to $553,500 in 2026. As a result, it may be beneficial to claim income in 2025 while increasing expenses to maximize the deduction.
Roth IRA conversions
Roth IRA conversions are generally a good strategy. However, converting a traditional IRA to a Roth IRA increases your Adjusted Gross Income (AGI), which can impact various tax deductions and lead to higher taxes. It’s essential to evaluate the implications of a Roth conversion and consult with your tax lawyer to perform the necessary calculations. One advantage to consider is the higher standard deduction; the $30,000 standard deduction may help offset some of the income generated by the conversion to a Roth IRA. This is an essential factor to keep in mind.
529 Withdrawals
529 plans for educational savings allow for tax-free withdrawals for a variety of expenses incurred after the passage of the Trump tax bill on July 4. In addition to expanding the uses of 529 plans for K-12 education, eligible expenses now include books, standardized tests such as the SAT, LSAT, and MCAT, as well as the materials needed to prepare for these tests. Individual tutoring for these exams is also covered. The total expenditure for 2025 must be $10,000 or less, which will increase to $20,000 in 2026.
Deductions 2025 and 2026
It’s interesting to note that there is still an opportunity to make deductions for SEP IRAs, IRAs, and health savings accounts after December 31, 2025. These deductions can be applied until the filing of the 1040 tax return on April 15, 2026. This means that if a business has not made contributions to the SEP IRA, it may still be possible to deduct 2025 contributions using funds from 2026. Many professional tax preparers can create hypothetical scenarios to analyze the impact on various taxes and deductions.
Conclusion
Although it is late in the year, there are still opportunities to take advantage of tax benefits for 2025. If you have any questions, please call me at 856-665-2121.
RJC -12/14/2025
