News & Insights

2025 YEAR-END INCOME TAX PLANNING FOR INDIVIDUALS

November 26, 2025

HIGHLIGHTS OF PROVISIONS INCLUDED IN H.R.1 – ONE BIG BEAUTIFUL BILL ACT (OBBBA) SIGNED INTO LAW ON JULY 4, 2025

The OBBBA makes many of the Tax Cuts And Jobs Act Of 2017 (TCJA) provisions, that were set to expire at the end of 2025, permanent and introduces new tax legislation that should be considered as part of your individual income tax planning. The following are selected legislation changes affecting 2025 year-end income tax planning. 

Increased Standard Deduction. Since 2018, when the standard deduction was basically doubled by the TCJA, fewer individuals have itemized their deductions. The OBBBA makes these higher standard deduction amounts permanent and increases the standard deduction for 2025 and indexes these amounts for inflation after 2025. The Standard Deduction amounts for 2025 are: Joint Return – $31,500; Single and Married Filing Separately – $15,750; and Head-of-Household – $23,625. Note! There is an additional standard deduction for taxpayers who are disabled or blind of $1,600 each for joint filers ($2,000 if single) for 2025. 

Increased Limitation On State And Local Tax Deductions (SALT). For 2018 through 2025, the TCJA limited the aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) to $10,000 ($5,000 for married individuals filing separately). However, beginning with the 2025 tax year, the OBBBA increases the SALT limitation from $10,000 to $40,000 for 2025 and $40,400 for 2026! Planning Alert! One of the traditional planning tools used by itemizers who pay state estimated tax payments was to pay the 4th quarter estimate before year-end to allow an itemized deduction for that payment. With the new $40,000 cap, many taxpayers could once again benefit from this simple but effective planning move if their itemized deductions exceed the standard deduction. Note! The SALT limitation is reduced in 2025 once your modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 if married filing separately) and will be $10,000 for 2025 if your MAGI is more than $600,000 ($5,000 if MAGI is more than $300,000 if married filing separately). The deduction will also not apply to those using the standard deduction.

Additional Deduction For Seniors. For years 2025-2028, the OBBBA provides a new $6,000 deduction for individuals who are at least age 65 by the end of the year. The deduction is for taxpayers with modified adjusted gross income (MAGI) of $75,000 or less ($150,000 or less for joint filers). This temporary deduction is reduced (but not below zero) by 6% of modified adjusted gross income in excess of the above threshold amounts. The deduction is not allowed for taxpayers with MAGI of $175,000 or more ($250,000 or more for those filing a joint return). The deduction may be taken whether the taxpayer uses the standard deduction or itemizes. Note! Those individuals who qualify for the senior deduction must include their social security number on their tax return for the year the deduction is taken. If married individuals are each age 65 or older, each may qualify for the $6,000 deduction. In addition, married individuals must file a joint return to claim the deduction. Planning Alert! It’s important to factor in this new deduction to determine if 2025 estimates/withholding should be modified before the end of 2025.

Car Loan Interest Deduction. The OBBBA introduced a new deduction, for tax years 2025 through 2028, of up to $10,000 for interest paid on loans used to purchase new, qualified passenger vehicles for personal use. The deduction is available to those using the standard deduction as well as those who itemize. The debt must be incurred after 2024 for the purchase of and must be secured by a first lien on a qualified passenger vehicle. The deduction is completely phased out when MAGI is $249,001 or greater for joint filers or $149,001 or greater for others. A “qualified passenger vehicle” generally includes a car, minivan, van, SUV, pickup truck, or motorcycle that is new, the final assembly of which occurs in the United States and serves as collateral for the loan. Planning Alert! Please provide us with the details of any new automobile purchases in 2025 so we can determine if the interest paid on the loan to purchase the vehicle qualifies for this new deduction. 

Qualified Overtime Pay Deduction. Another new provision of the OBBBA for tax years 2025 through 2028, is an annual deduction of up to $12,500 ($25,000 if filing jointly) for qualified overtime pay received. “Qualified overtime pay” is overtime paid under the Fair Labor Standards Act of 1938 (FLSA) to individuals in excess of their regular rate under the FLSA. That means only the premium portion of overtime (for example, the “half” in “time-and-a-half”) qualifies for the deduction. Taxpayers must include their social security number on their income tax return to deduct the qualified overtime pay. The deduction is available to those using the standard deduction as well as those who itemize. However, the deduction is not allowed for married individuals who do not file a joint return. The deduction is reduced once MAGI exceeds $300,000 for those filing joint returns ($150,000 for others) and no deduction is allowed once MAGI reaches $550,000 for those filing joint returns ($275,000 for others). Planning Alert! Form W-2 and Forms 1099 have not been modified for 2025 to accommodate reporting overtime. For 2025, the IRS says employers can select a “reasonable method” to separate and identify the premium portion of overtime that qualifies under the FLSA definition and provide that to employees (for claiming the deduction).  The IRS has also provided for an employee to use a reasonable method to determine qualified overtime compensation on other documentation, such as pay statements if a separate statement is not provided by the employer. 

Qualified Tips Deduction. For tax years 2025 through 2028, the OBBBA creates a deduction of up to $25,000 of qualified tips received during the year in occupations listed by the IRS as customarily and regularly receiving tips before 2025. The deduction is available to those using the standard deduction as well as those who itemize. The tips must be reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137. Married taxpayers must file a joint return to claim the deduction. The deduction is reduced once MAGI exceeds $300,000 for those filing joint returns ($150,000 for others) and no deduction is allowed once MAGI reaches $550,000 for those filing joint returns ($400,000 for others). Note! The IRS has published a list of occupations that customarily and regularly received tips before 2025 and can be found by searching on the web for “REG-110032-25.” Once at the Federal Register website, scroll down until you find table A.

Enhanced Child Tax Credit. The TCJA increased the Child Tax Credit for each qualifying child to $2,000 for tax years 2018 through 2025. In addition, the TCJA allowed up to $1,700 of the child credit to be refundable. The OBBBA makes the child tax credit permanent and, beginning in 2025, increases the credit to $2,200 per qualifying child. The maximum refundable credit amount for 2025 remains at $1,700 and will continue to be indexed in the future.

Adoption Credit Refundable Up To $5,000. The Federal Adoption Credit, which was created to help with the expenses of adopting a child, is $17,280 beginning with 2025. The OBBBA changed the credit beginning with 2025 so that up to $5,000 of the credit is refundable. Planning! Any unused amount of the refundable portion of the credit may NOT be carried forward. 

Expansion Of 529 Plan Benefits. The OBBBA expands the types of expenses that may be distributed tax free from a 529 plan. Effective for distributions from 529 plans after July 4, 2025, qualified postsecondary credentialing expenses are added to the definition of qualified higher education expenses (QHEEs). In addition, the OBBBA expands the definition of education expenses that may be paid tax free from a 529 plan for elementary or secondary school education for amounts paid after July 4, 2025. Note! If you would like more information on what qualifies as QHEEs and what expenses are now included in the definition of education expenses for a 529 plan, please contact us and we will be happy to provide you with the details. Planning! The annual $10,000 limit on 529 plan payments for elementary or secondary education for each beneficiary is increased to $20,000 for payments after 2025. 

Clean Vehicle Credits Terminated For Vehicles Purchased After 9/30/25! The New Clean Vehicle Credit of up to $7,500 and the Previously Owned Clean Vehicle Credit of up to $4,000 were terminated by the OBBBA for vehicles acquired after September 30, 2025. Planning Alert! If you purchased a new or previously owned clean vehicle after September 30, 2025, and planned on taking the clean vehicle credit on your 2025 tax return, please contact us as soon as possible. We may need to adjust your estimated payments and/or withholding in order to cover the loss of this credit.

No Credits For Energy Efficient Home Improvements After 2025. The OBBBA repeals the Energy Efficient Home Improvement Credit for property placed in service after 2025. Therefore, if you planned on purchasing energy efficient insulation, doors, windows, skylights or energy efficient heat pumps, air conditioners, furnaces, water heaters, or boilers for your residence in the near future, you should consider purchasing and placing the items in service (making sure the items are ready and available for use) before 2026. The OBBBA also repeals the Residential Clean Energy Credit for expenditures made after 2025. The IRS says that an expenditure with respect to an item is treated as made when the original installation of the item is completed. Therefore, if you planned on purchasing solar panels, solar water heaters, geothermal heat pump property, etc., in the near future, you should consider purchasing and installing the items before 2026, so you qualify for the 30% credit. 

INDIVIDUAL PLANNING WITH TRADITIONAL YEAR-END TAX PLANNING STRATEGIES AS AFFECTED BY THE OBBBA

Each year, we discuss several traditional year-end tax planning strategies to help reduce taxable income. One of those is to reduce taxable income in the current year by deferring taxable income into later years and accelerating deductions into the current year. This strategy is beneficial when your income tax rate in the coming year (2026) is expected to be the same or lower than the current year (2025). Consequently, in the following discussion we include traditional year-end tax planning strategies that would allow you to accelerate your deductions into 2025, while deferring your income into 2026. Planning Alert! For individuals who expect their 2025 income tax rate to be much lower than their 2026 income tax rate, the opposite strategy might be more advantageous. As a result, individuals who have a significant drop in income during 2025 may decide it’s better to accelerate income into 2025 (to be taxed at lower rates), while deferring deductions into 2026 (to be taken against expected higher rates). Caution! Before accelerating or deferring income or deductions, the effects of the acceleration or deferral on the new benefits provided in the OBBBA first effective in 2025 as well as the OBBBA provisions first effective in 2026 must be considered. The OBBBA makes year-end income tax planning much more complicated since many of the beneficial provisions in the OBBBA are reduced as your modified adjusted gross income (MAGI) exceeds certain thresholds. We’re happy to assist you in deciding if deferring or accelerating income will benefit you.

Watch Out For OBBBA Changes To The Alternative Minimum Tax. When deciding if income or deductions should be deferred to 2026, the alternative minimum tax (AMT) must be considered since this is the tax you will pay if the AMT exceeds the regular income tax. Beginning in 2026, the OBBBA reduces the amount of alternative minimum taxable income (AMTI) at which the AMT exemption amounts will be phased out and increases the rate of the phase out.

It May Be Beneficial To Postpone Sale Of Certain Farmland Until 2026. The OBBBA allows a deferral of gains from the sale of certain farmland. For sales or exchanges in tax years beginning after July 4, 2025 (i.e., after 2025 for calendar-year taxpayers), to a qualified farmer, a taxpayer may elect to pay taxes on gains from the sale or exchange of qualified farmland property in equal installments over 4 years. Planning Alert! Please contact us if you would like more details.

Benefits Of Above-The-Line Deductions. As we mentioned earlier, traditional year-end planning includes accelerating deductible expenses into the current tax year. So-called “above-the-line” deductions reduce both your adjusted gross income and your modified adjusted gross income, while itemized deductions do not reduce either adjusted gross income or modified adjusted gross income. Deductions that reduce your adjusted gross income (or modified adjusted gross income) can generate multiple tax benefits by: 1) Reducing your taxable income and allowing you to be taxed in a lower tax bracket; 2) Potentially freeing up other deductions (including the Deduction For Seniors, SALT Deduction, Car Loan Interest Deduction, Overtime Pay Deduction, Qualified Tips Deduction) and tax credits that phase out as your adjusted gross income (or modified adjusted gross income) increases; 3) Potentially reducing your modified adjusted gross income below the income thresholds for the 3.8% Net Investment Income Tax; 4) Possibly reducing your household income to a level that allows you to qualify for a refundable Premium Tax Credit for health insurance purchased on a government Exchange, or 5) As we discuss later, potentially reducing your taxable income to a level that could maximize your 20% Deduction. Planning Alert! As a cash method taxpayer, you can generally accelerate a 2026 deduction into 2025 by “paying” the deductible item in 2025. “Payment” typically occurs in 2025 if, before the end of 2025: 1) A check is delivered to the post office, 2) Your electronic payment is debited to your account, or 3) An item is charged on a third-party credit card. 

• Possible above-the-line deductions include: 1) Military Moving Expenses that are available to active members of the Armed Forces and, after 2025 per the OBBBA, an employee or new appointee of the intelligence community if the move is pursuant to a change in assignment requiring relocation; 2) Qualifying Alimony Payments (if the divorce or separation instrument was executed before 2019); 3) Health Savings Account (HSA) Contributions with a maximum deduction for a self-only coverage plan of $4,300 and $8,550 for a family coverage plan. In addition, taxpayers at least 55 by the close of 2025, can add $1,000 ($5,300 & $9,550); and 4) Student Loan Interest with a possible deduction of up to $2,500 of interest paid on a qualified student loan during 2025. 

Benefits Of Itemized Deductions. Although itemized deductions (i.e., below-the-line deductions) do not reduce your adjusted gross income or modified adjusted gross income, they still may provide valuable tax savings if your itemized deductions exceed your standard deduction.

• Possible itemized deductions include: 1) Medical Expenses that, for 2025, exceed 7.5% of your adjusted gross income (AGI). Planning Alert! If you paid medical expenses for a child, parent, etc. who you are unable to claim as a dependent due to their 2025 gross income, it may be possible to deduct those expenses as paid for your medical dependent; 2) State And Local Taxes paid during the tax year. As we mentioned previously, beginning with the 2025 tax year, the OBBBA increases the maximum possible state and local tax (SALT) limitation from $10,000 to $40,000 for 2025 and $40,400 for 2026. Planning Alert! Most states have enacted legislation allowing partnerships and S corporations to elect to pay state and local income taxes on the partnership’s or S Corporation’s income. If this election is made, the state and local taxes paid by the partnership or S Corporation are deductible by the entity and reduce the income flowing through to the partners or shareholders; 3) Home Mortgage Interest Deduction is limited to the interest paid on up to $750,000 ($375,000 if married filing separately) of acquisition indebtedness incurred after December 15, 2017, which was reduced under the TCJA from $1,000,000 to $750,000 ($375,000 if married filing separately) through 2025. This TCJA limitation was made permanent by the OBBBA. Planning Alert! Home equity loans (e.g., HELOCs) can be “acquisition indebtedness” if used to acquire, construct, or substantially improve a qualified residence; 4) Charitable Contributions paid in cash or charged on a credit card in 2025 increase your itemized deductions. A charitable contribution deduction is allowed for 2025 if the check is mailed on or before December 31, 2025, or the contribution is made by a credit card charge in 2025. However, if you merely give a note or a pledge to a charity, no deduction is allowed until you pay the note or pledge. Planning Alert! Starting in 2018 (with no sunset date), a charitable contribution deduction is not allowed for contributions made to colleges and universities in exchange for the contributor’s right to purchase tickets or seating at an athletic event. Update! The OBBBA makes several changes to the rules for deducting charitable contributions beginning in 2026. Please contact us if you would like more details; 5) Casualty Loss Deductions for years 2018 through 2025 are generally suspended under the TCJA for personal casualty losses and theft losses. However, personal casualty losses attributable to Federally declared disasters continue to be deductible. For tax years beginning after 2025, the OBBBA makes this provision for taking a personal casualty loss permanent and adds certain state-declared disasters as qualifying disasters in addition to Federally declared disasters; and 6) Un-Reimbursed Employee Business Expenses incurred from 2018 through 2025, are not deductible as a miscellaneous itemized deduction under the TCJA. Update! The OBBBA makes the suspension of the deduction for miscellaneous itemized deductions permanent. Therefore, the deduction for miscellaneous itemized deductions and the corresponding 2% of AGI limitation will not be reinstated in 2026 and Un-Reimbursed Employee Business Expenses will not be deductible. However, beginning with the 2026 tax year, the OBBBA provides that qualified educator expenses in excess of the above-the-line deduction limitation (e.g., $300 for 2025) are deductible as an itemized deduction if the educator itemizes deductions. 

Postponing Taxable Income May Save Taxes. Generally, deferring taxable income from 2025 to 2026 may reduce your income taxes, if your effective income tax rate for 2026 will be lower than your effective income tax rate for 2025. Moreover, deferring income from 2025 to 2026 may provide you with the same tax benefits listed previously when you accelerate AGI deductions into 2025 (i.e., Freeing up other deductions and tax credits that phase out as your adjusted gross income or modified adjusted gross income increases; Reducing your modified adjusted gross income below the income thresholds for the 3.8% Net Investment Income Tax; Reducing your household income to a level that allows a refundable Premium Tax Credit; or, Reducing your taxable income to a level that maximizes the 20% Deduction). Planning Alert! If, after considering all factors, you believe deferring taxable income into 2026 will save you taxes, consider the following:

• Planning For Tax Rates. The deferral of income could cause your 2025 taxable income to fall below the thresholds for the highest 37% tax bracket (i.e., $751,601 for joint returns; $626,351 if single). If you have income subject to the 3.8% Net Investment Income Tax and the income deferral reduces your 2025 adjusted gross income below the thresholds for the 3.8% NIIT, you may avoid this additional 3.8% tax on your investment income. In addition, if you reduce your modified adjusted gross income below the Net Investment Income Tax thresholds, you may avoid the additional Medicare tax of 0.9% on your wages and/or self-employment income. Note! If you are a self-employed individual using the cash method of accounting, consider delaying year-end billings to defer income until 2026. Planning Alert! Remember, if you receive the check in 2025, waiting until 2026 to make the deposit does not defer the income.

INDIVIDUAL PLANNING WITH INVESTMENT INCOME

Planning With The 3.8% Net Investment Income Tax (3.8% NIIT). The 3.8% Net Investment Income Tax (3.8% NIIT) applies to the Net Investment Income of higher-income individuals. This tax applies to individuals with modified adjusted gross income exceeding the following thresholds: $250,000 for married filing jointly; $200,000 if single; and $125,000 if married filing separately. The 3.8% NIIT is imposed upon the lesser of an individual’s: 1) Modified adjusted gross income in excess of the threshold, or 2) Net investment income. The 3.8% NIIT not only applies to traditional types of investment income (i.e., interest, dividends, annuities, royalties, and capital gains), it also applies to business income that is taxed to a passive owner (as discussed in more detail below) unless the passive income is subject to S/E taxes. If you believe the 3.8% NIIT may apply to you, consider the following planning techniques: 

• Pick Investments That Generate Income Exempt From The 3.8% NIIT. The following types of income are not subject to the 3.8% NIIT: tax-exempt bond interest; gain on the sale of a principal residence otherwise excluded from income under the home-sale exclusion rules (i.e., up to $250,000 on a single return, up to $500,000 on a joint return); and distributions from qualified retirement plans (e.g., 401(k) plans, IRAs, 403(b) annuities, etc.). Planning Alert! Although taxable distributions from qualified retirement plans are exempt from the 3.8% NIIT, the taxable distributions will increase your modified adjusted gross income. Therefore, to the extent the taxable distributions cause your modified adjusted gross income to exceed the thresholds for the 3.8% NIIT, the distributions could cause your other net investment income (e.g., dividends, interest, capital gains, rents, passive income) to be hit with the 3.8% NIIT.
• Roth IRAs (Including Roth IRA Conversions). Tax-free distributions from a Roth IRA are exempt from the 3.8% NIIT, and do not increase your modified adjusted gross income (and thus will not increase your exposure to the 3.8% tax). However, if you are considering converting a traditional IRA into a Roth, the income triggered in the year of conversion would increase your modified adjusted gross income and, therefore, may increase your exposure to the 3.8% NIIT on your net investment income. Planning Alert! If you want a Roth conversion to be effective for 2025, you must transfer the amount from the regular IRA to the Roth IRA no later than December 31, 2025. Caution! Please contact us if you need help in deciding whether to convert to a Roth IRA. 
• Tax-Deferred Investments. The 3.8% NIIT does not apply to earnings generated by a tax-deferred annuity (TDA) contract until the income is distributed. Thus, after first considering the economics, investing in a TDA in your higher-income years may allow you to defer the annuity income until later years when your modified adjusted gross income is below the 3.8% NIIT thresholds.
• Passive Income. “Net Investment Income” for purposes of the 3.8% NIIT generally includes net income from a business activity if you are a passive owner (unless the income constitutes self-employment income that is subject to the 2.9% Medicare tax). You will generally be deemed a “passive” owner if you do not “materially participate” in the business as determined under the traditional passive activity loss rules. Note! If you need help understanding the passive activity rules, please contact our firm. 

Planning With Capital Gains And Losses. Generally, net capital gains (both short-term and long-term) are potentially subject to the 3.8% NIIT. This could result in an individual filing a joint return with taxable income for 2025 of $600,051 or more ($533,401 or more if single) paying Federal income tax on net long-term capital gains at a 23.8% rate (i.e., the maximum capital gains tax rate of 20% plus the 3.8% NIIT). In addition, an individual’s net short-term capital gains could be taxed as high as 40.8% (i.e., 37% plus 3.8%), for Federal income tax purposes. Consequently, traditional planning strategies involving the timing of your year-end sales of stocks, bonds, or other securities continue to be as important as ever. Planning Alert! Always consider the economics of a sale or exchange first! The following are effective planning techniques to consider for sales of capital assets. 

• Capital Gains And Dividends Zero Percent Tax Rate. For individuals filing a joint return with 2025 taxable income of less than $96,701 (less than $48,351 if single), their long term capital gains and qualified dividends are taxed at a zero percent rate. Planning Alert! If you believe your 2025 taxable income will be less than $96,701 (less than $48,351 if single), please contact us and we will help you determine whether you can take advantage of this zero percent tax rate for long-term capital gains and qualified dividends. Note! The zero percent rate is particularly important to lower-income retirees who rely largely on investment portfolios that generate dividends and long-term capital gains. 
• Timing Your Capital Gains And Losses. If the value of some of your investments is less than your cost, it may be a good time to harvest some capital losses. For example, if you have already recognized capital gains in 2025, consider selling securities prior to January 1, 2026, that would trigger capital losses. These losses will be deductible on your 2025 return to the extent of your recognized capital gains, plus $3,000. Tax Tip! These losses may have the added benefit of reducing your income and allowing you to qualify for other tax breaks. Caution! If, within 30 days before or after the sale of loss securities, you acquire the same securities, the loss will not be allowed currently because of the wash sale rules. Planning Alert! To avoid the wash sale rules, consider buying shares of a different company in the same sector. 
• Planning With Capital Loss Carryforwards. If you have substantial capital loss carryforwards coming into 2025, consider selling enough appreciated securities before the end of 2025 to decrease your net capital loss to $3,000. All else being equal, you should sell the short-term gain (held for 12 months or less) securities first. This will allow your net capital loss (in excess of $3,000) to offset your short-term capital gain, while preserving favorable long-term capital gain treatment for later years. Planning Alert! Your net short-term capital gains can be used to free up a deduction for any investment interest you have incurred (e.g., interest you have paid on your margin account). If you eliminate your short-term capital gains by recognizing your short-term capital losses, you may be restricting your ability to deduct your investment interest.

INDIVIDUAL PLANNING WITH RECENT CHANGES TO IRAS AND QUALIFIED RETIREMENT PLANS

10-Year Required Minimum Distribution Rule For Retirement Plans Of Individuals Dying After 2019. The IRS has issued regulations interpreting the required minimum distribution (RMD) rules for retirement plans (including qualified retirement plans, §403(b) annuity contracts, IRAs, and §457 deferred compensation plans) as modified by SECURE Act 1.0 and 2.0. The regulations provide a10-year distribution rule for plan beneficiaries who are not “eligible designated beneficiaries” of retirement plans where the owner of the retirement account dies on or after the account owner’s required beginning date (currently the April 1st following the year the account owner reaches age 73). An Eligible Designated Beneficiary is a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the account owner, or a child of the account owner who has not reached age 21. The 10-year rule requires distributions to begin in the calendar year following the calendar year of the account owner’s death and requires the entire account balance to be distributed by the end of the 10th calendar year following the calendar year of the account owner’s death. This new 10-year rule was to be effective for retirement account beneficiaries of individuals dying after 2019. The IRS now says that designated beneficiaries of account owners in IRAs or defined contribution plans who were not “Eligible Designated Beneficiaries” and were subject to the 10-year rule will not be penalized for failing to take RMDs in 2021, 2022, 2023, or 2024 where the account owner died in 2020, 2021, 2022, or 2023 on or after reaching the account owner’s required beginning date. Planning Alert! The regulations do not require distributions that were not made in 2021, 2022, 2023, or 2024 to be made in 2025. However, the distribution that is otherwise required for 2025 is required to be made in 2025 to avoid the failure to distribute penalty. In addition, any balance remaining in the plan for the beneficiary in the 10th calendar year following the calendar year of the account owner’s death must be distributed to the beneficiary in that 10th year to avoid penalties.

MISCELLANEOUS INDIVIDUAL PLANNING CONSIDERATIONS

Contribute The Maximum Amount To Your Traditional IRA. As your income rises and your marginal tax rate increases, deductible IRA contributions generally become more valuable. As you evaluate how much you should contribute to your IRA, consider the following. If you are married, even if your spouse has no earnings, you can generally deduct, in the aggregate, up to $14,000 ($16,000 if you are both at least age 50 by the end of the year) for contributions to you and your spouse’s traditional IRAs. You and your spouse must have combined earned income at least equal to the total contributions. However, no more than $7,000 ($8,000 if at least age 50) may be contributed to either your IRA account or your spouse’s IRA account for 2025. If you are an active participant in your employer’s retirement plan during 2025, your IRA deduction is reduced ratably as your adjusted gross income increases from $126,000 to $146,000 on a joint return ($79,000 to $89,000 on a single return). However, if you file a joint return with your spouse and your spouse is an active participant in his or her employer’s plan and you are not an active participant in a plan, your IRA deduction is reduced as the adjusted gross income on your joint return goes from $236,000 to $246,000. Caution! Every dollar you contribute to a deductible IRA reduces your allowable contribution to a nondeductible Roth IRA. The sum of your contributions for the year to your Roth IRA and to your traditional IRA may not exceed the $7,000/$8,000 limits discussed above. For 2025, your ability to contribute to a Roth IRA is phased out ratably as your adjusted gross income increases from $236,000 to $246,000 on a joint return or from $150,000 to $165,000 if you are single. Planning Alert! Unlike the rule for traditional IRA contributions, the amount you may contribute to a Roth IRA is reduced if your adjusted gross income falls within these phase-out ranges regardless of whether you or your spouse is a participant in another retirement plan. In addition, contributions to a Roth IRA are not deductible. 

Contribute The Maximum Amount To Your 401(k). Participants have until December 31st to contribute to their 401(k). For 2025, the maximum contribution amount is $23,500 ($31,000 if at least 50 years old and $34,750 if age 60-63). Contributions to your 401(k) will decrease your current year taxable income and add to your retirement savings.

Individuals 70½ Or Older By December 31st, Should Consider A Qualified Charitable Distribution (QCD). A Qualified Charitable Distribution (QCD) allows a donation to a charitable organization of up to $108,000 from a traditional IRA. These contributions are excluded from income and count toward your RMD for 2025. Caution! These contributions are not deductible as itemized deductions. However, if you normally take the standard deduction, a QCD could be even more beneficial since the distribution will be excluded from your income. 

Standard Mileage Rates Effective For 2025. The standard mileage deduction rate for your deductible business miles was increased to 70.0 cents per mile effective January 1, 2025. The charitable mileage rate is still 14.0 cents per mile since it’s not indexed and the rate for medical and moving mileage is 21.0 cents per mile for 2025. Planning Alert! Be sure to keep proper records of your mileage for use as a possible tax deduction.

Remember The 20% Deduction For Qualified Business Income. Don’t forget the 20% Deduction under Section 199A (20% Deduction) with respect to Qualified Business Income, Qualified REIT Dividends, and Publicly Traded Partnership Income. The 20% Deduction does not reduce your adjusted gross income or impact your calculation of self-employment tax. Instead, the deduction simply reduces your taxable income (regardless of whether you itemized deductions or claim the standard deduction). In other words, the 20% Deduction is allowed in addition to your itemized deductions or your standard deduction. Note! The 20% Deduction for Qualified Business Income was set to expire at the end of 2025. Update! The OBBBA makes the 20% QBI deduction permanent. 

Consider Paying Qualified Education Expenses Early To Increase Education Tax Credits. If you pay educational expenses for 2025, you may be able to take advantage of either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit. The $2,500 AOTC applies to qualified education expenses for the first four years of higher education for an eligible student. In addition, up to $1,000 of the AOTC is refundable. The Lifetime Learning Credit applies to payment of qualified tuition and related expenses for an eligible student attending a qualifying educational institution. This up to $2,000 credit applies to both undergraduate and graduate classes. Note! Both the AOTC and Lifetime Learning Credit begin phasing out at $80,000 of modified adjusted gross income and are completely phased out when modified adjusted gross income reaches $90,000 ($160,000 to $180,000 for joint returns). 

Planning Alert! Qualified education expenses paid for the first semester of the following year (2026 spring semester) before the end of 2025 qualify for the credit(s).

Gift And Estate Tax Planning. For 2025, a donor can gift up to $19,000 to each donee. It is not a taxable gift by the donor and gifts are not included in the recipient’s income. Each individual has a unified credit sufficient to exclude up to $13,990,000 (for 2025) of assets from the gift tax or estate tax. Planning Alert! Using the annual gift tax exclusion (i.e. $19,000 for 2025) is an effective tool to move assets out of your estate without creating any gift tax or using any of your unified credit amount. Update! The OBBBA increases the value of the unified credit (i.e., the exclusion amount) to $15,000,000 for estates of individuals dying and gifts made after 2025. The $15,000,000 will be indexed for inflation for those dying and for gifts made after 2026 with a base year of 2025.

Social Security Tax Wage Base. For 2025, wages and self-employment income subject to the 15.3% Social Security Tax is $176,100, which is an increase from $168,600 in 2024. The Social Security tax wage base for 2026 is scheduled to increase to $184,500.

Consider Using The IRS Tax Withholding Estimator To Avoid Surprises. In order to avoid an unexpected tax liability and possible penalties and interest in 2026, it’s a good idea to revisit your withholding and estimated tax payments before year-end. The IRS encourages taxpayers to use its Tax Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator to ensure they have the correct amount of taxes paid in before December 31st. Remember! It is especially important to review your withholding if you’ve had a job change, additional income stream, marriage, divorce, loss of a dependent or other significant events occur during 2025. Note! The estimator has not yet been updated to reflect the new provisions of the One Big Beautiful Bill Act. If you believe your tax liability has been affected because of a significant event, and you have questions, please contact our firm so we can discuss it.

KEY 2025 NUMBERS AT A GLANCE

MARYLAND TAX LAW CHANGES – 2025 YEAR-END PLANNING UPDATE

As we approach year-end, Maryland taxpayers should be aware of significant state tax law changes effective for the 2025 tax year. The Maryland General Assembly enacted a package of tax increases and reforms (via the 2025 Budget Reconciliation and Financing Act) that will impact individual tax bills and planning strategies. Below is a summary of the key Maryland tax changes and considerations for individual clients:

• Higher Personal Income Tax Rates for Top Earners: Maryland introduced two new top income tax brackets starting in 2025 to increase revenue. High-income individuals – including many professionals such as physicians, attorneys, and business owners – will pay more Maryland tax on their 2025 income. The state rate is now 6.25% on taxable income over $500,000 (single/$600,000 joint) and 6.5% on income over $1,000,000 (single/$1.2 million joint). By comparison, income below these thresholds continues to be taxed at the lower graduated rates (up to 5.75%). Planning tip: Affected taxpayers may need to adjust withholding or Q4 estimates to account for the higher 2025 rates. Because these changes were enacted mid-year, the state will waive underpayment penalties attributable to the new rates, but any shortfall will still be due by April 15, 2026. High earners should budget for a larger Maryland tax obligation on 2025 income.
• 2% Capital Gains Tax Surcharge: Maryland now imposes an additional 2% tax on net capital gains for taxpayers with federal AGI above $350,000. This surtax applies to capital gains income (e.g. sale of investments, businesses, or real estate) and is in addition to the regular state and local income tax. For example, a Maryland resident with a $500,000 capital gain and $400,000 AGI would owe an extra $10,000 in Maryland tax (2% of the gain) under this new law. Exemption: Gain on the sale of a principal residence (owner-occupied) is exempt from the surtax if the home’s sale price is below $1.5 million, providing relief for most home sellers. Also, gains from the sale of certain business assets that qualified for Section 179 expensing (e.g. equipment, machinery) are excluded from this surtax. Who is affected? Primarily high-income investors and business owners – for instance, executives exercising stock options, families selling rental properties or businesses, or professionals realizing large investment gains. These individuals should consider the timing of large sales and possible strategies to spread gains over multiple years (e.g. installment sales or like-kind exchanges where available) to mitigate crossing the $350k AGI threshold in a single year. Note: The 2% capital gains tax took effect January 1, 2025, so it will apply to any qualifying gains realized during the full 2025 calendar year.
• Standard Deduction Increase and Itemized Deduction Phase-Out: Maryland has simplified and enhanced the standard deduction while curbing itemized deductions for upper-income filers. All taxpayers will now be eligible to claim a flat standard deduction of $3,350 (single) or $6,700 (married filing jointly) for 2025, adjusted annually for inflation. This is an increase from prior limits (approximately $2,700/$5,450) and no longer phases out at higher incomes – a benefit to middle-income taxpayers and anyone who does not itemize. For those who itemize deductions on their Maryland return, a new phase-out rule applies for higher income. Maryland itemized deductions are reduced by 7.5% of the amount by which federal AGI exceeds $300,000 (for most filers; a $200,000 threshold applies to married filing separately). In practical terms, a taxpayer with $500,000 AGI (single) would lose about $22,500 of itemized deductions that would otherwise be allowed. This phase-out is separate from federal limitation rules and notably, Maryland already disallows state income tax payments as a deductible item – that policy remains in effect. Planning implications: Taxpayers in the phase-out range should evaluate whether bunching deductions (e.g. charitable contributions) into alternate years might optimize their tax benefit, or whether the higher standard deduction now yields a better result. High-income households should also be prepared for Maryland taxable income to be higher than in past years due to capped deductions. We will compute the optimal strategy as part of year-end planning.
• Local Tax Rate Changes: Maryland counties and Baltimore City levy their own income tax on top of the state rates. The new law allows counties to increase local income tax rates up to 3.3% (previous cap was 3.2%). For now, no county has announced an increase for 2025 above the prior 3.2% maximum, but this bears watching in coming budgets. We will keep you informed of any local rate changes that would affect withholding or estimates.
• Expanded Sales Tax on Services (“Tech Tax” effective July 1, 2025): Maryland business owners and consumers should note that the 6% sales and use tax was expanded to include digital products and services as of July 1. In particular, a new 3% sales tax rate applies to specified digital, data, and software services. This includes services categorized in certain tech-related NAICS codes – for example, cloud computing services, data storage and processing, web hosting, online software subscriptions, and IT consulting/design services are now taxable in Maryland. The tax is charged to the customer (similar to any sales tax), but businesses providing these services must collect and remit it. Impact on individuals: If you or your business purchase such services (for instance, cloud software subscriptions, web services, or tech support contracts), you may notice a 3% Maryland sales tax on bills starting in the second half of 2025. Likewise, Maryland-based IT and software firms need to ensure compliance with the new tax – they should have updated their billing systems to add the 3% sales tax for Maryland customers and obtained a sales tax license if not already registered. Certain exemptions exist – for example, cloud computing services sold to a qualified cybersecurity business are exempt – but generally this represents a broadening of the sales tax base. We encourage any clients in the tech sector to reach out for guidance on the specifics of this law. Note that this “tech tax” is separate from income tax and does not directly affect your Maryland income tax return; however, it may increase the cost of technology services you use in your business or personal life.
• Vehicle Excise Tax: The tax on vehicle purchases (titling tax) increased from 6% to 6.5% as of July 1, 2025. Car buyers will pay more in tax on new or used vehicle purchases when registering in Maryland. (For example, a $30,000 car incurs $1,950 excise tax now, up from $1,800.) If you are considering a vehicle upgrade, note this higher tax in your budget.
• Rental Vehicle Tax: A new 3.5% tax applies to short-term vehicle rentals (on top of the existing sales tax). Maryland residents renting cars (or using services like ZipCar) will see this tax added. Businesses in the rental car industry should have started collecting this in July.
• Online Sports Betting & Gaming: The tax on sports wagering revenue was increased from 15% to 20%. While this is levied on the betting operators, over time it could be reflected in odds or payouts for bettors.

2025 YEAR-END ACTION ITEMS

• Review 2025 withholding and estimated taxes considering new Maryland brackets and the capital-gains surtax.
• Evaluate timing of capital-gains transactions, stock-option exercises, RSU sales, or business/rental property dispositions.
• Identify any subscriptions or digital services subject to the new 3 percent Maryland “tech tax” beginning July 1, 2025.
• Factor the higher 6.5 percent Maryland vehicle excise tax into any 2025–2026 car purchase plans.