Year-end tax moves to position you for success!
As the holiday season fills the air with giving and gratitude, it’s also the perfect time to give yourself the gift of proactive financial planning and minimizing your tax obligation to Uncle Sam. With 2025 on the horizon, the tax landscape may see significant shifts that could impact your financial goals. But the good news? There are things you can do today that can set you up for a more effortless, and less costly, tax season next year.
At Towerpoint Wealth, we believe the best gifts are the ones that keep giving, like a well-structured financial plan tailored to help you minimize your taxes and maximize wealth-building and wealth-protecting opportunities. That’s why this holiday season, we’re sharing six powerful year-end tax moves that you can consider to help you be better prepared for 2025.
So, as you enjoy the festivities and reflect on the year ahead, take a moment to unwrap these valuable insights and talk with your tax and financial advisor about ways that you can minimize your tax liability as you prepare for the new year.
Key Takeaways
- Proactive tax planning is essential, as small adjustments made now can help reduce your tax burden and set the stage for long-term financial success.
- With the Tax Cuts and Jobs Act (TCJA) set to potentially expire, preparing for potential higher tax rates and a reduced standard deduction may be a critical step in maintaining financial stability.
- Strategies like Roth conversions and tax-loss harvesting offer effective ways to minimize taxes and increase financial flexibility for the future.
- Optimizing “asset location” by placing tax-inefficient investments in the most tax-efficient accounts can significantly reduce tax drag and enhance portfolio growth over time.
- Reviewing your estate plan now allows you to take advantage of the current estate tax exemption before potential reductions occur in 2025.
Manage Capital Gains Distributions
Capital gains distributions can be an unwelcome surprise during tax season, particularly for investors holding mutual funds in taxable accounts. These distributions happen when fund managers sell securities within a fund at a profit and pass those taxable gains to investors, even if you haven’t sold a single share.
The result? A potentially unexpected tax bill that can feel especially frustrating in years when you haven’t sold anything, and/or the market or your portfolio is down.
At Towerpoint Wealth, we see this as an opportunity to take proactive steps that reduce the “tax drag” on your portfolio. By shifting investments prone to capital gains distributions into tax-advantaged accounts like IRAs or 401(k)s, you can defer taxes and keep more of your money growing. Another approach is to favor tax-efficient investments like ETFs or tax-managed mutual funds,which are designed to generate fewer taxable events, in your non-retirement, “regular” investment accounts.
This is why we regularly review client portfolios to identify and address these hidden tax inefficiencies. By making thoughtful adjustments, we ensure that investments are not just growing, but doing so as tax efficiently as possible. Managing capital gains distributions isn’t just about avoiding surprises right now, but also optimizing your strategy to support your longer-term goals.
Prepare for the TCJA Expiration
The Tax Cuts and Jobs Act (TCJA) introduced in 2017, brought major changes to the U.S. tax code, including lower tax brackets, a doubled standard deduction, and an expanded Child Tax Credit. However, many of these provisions are set to expire at the end of 2025, potentially resulting in higher taxes for individuals and families.
For investors, this potential expiration represents a critical window of opportunity. Strategies such as accelerating income to take advantage of today’s current lower tax rates, or making larger charitable contributions in the future (when tax rates may be higher), can help mitigate the impact of future changes. It’s also a good time to review all of your available tax deductions, like those for medical expenses or state and local taxes, to maximize the benefits before thresholds potentially shift, or after!
Being mindful of how these changes could affect your tax liability is key to staying on course with your financial goals. With the clock potentially ticking on the TCJA, thoughtful adjustments today can make all the difference in reducing your tax burden and keeping your plan aligned with the future.
Consider Roth IRA Conversions: Lock in Lower Tax Rates Now
Roth IRA conversions are a powerful strategy for managing taxes — both now and in retirement. By converting funds from a traditional IRA to a Roth IRA, you pay taxes on the converted amount today, but your future withdrawals, including earnings, are tax-free. This can be particularly advantageous if you expect tax rates to rise after the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025.
For many investors, partial Roth conversions — spreading the tax impact of a Roth conversion strategy over several years — offer a balanced approach. This strategy allows you to manage the tax impact of any Roth conversions on a year-by-year basis, while taking advantage of today’s lower tax rates. Plus, it gives you more flexibility to structure your retirement income in a way that minimizes your lifetime tax burden.
As with any financial decision, a Roth conversion certainly isn’t one-size-fits-all. To get the best result, you want to work with your tax and financial advisor to weigh factors like your current tax bracket, retirement timeline, and overall personal and financial goals to determine whether this move is the best option for your strategy.
By planning now, you can use the next few years to lock in tax savings and position yourself for greater financial flexibility in retirement.
Review Your Estate Plan
The Tax Cuts and Jobs Act (TCJA) didn’t just affect income taxes — it also significantly increased the federal estate tax exemption, allowing individuals to transfer up to $13.61 million to heirs, tax-free, in 2024. However, if the TCJA sunsets at the end of 2025 as scheduled, this exemption could be cut in half, exposing more estates to taxes.
For families looking to preserve generational wealth, now is the time to revisit your estate plan. Considering gifting assets to heirs while the exemption is higher can lock in today’s favorable limits. Alternatively, certain types of trusts can be a powerful tool for efficiently transferring wealth while protecting assets from unnecessary taxation.
Even if you don’t expect to exceed the current or reduced estate tax exemption limits, reviewing your estate plan every five or six years helps to ensure that it reflects your financial goals and family’s needs is an excellent idea.
Proper estate planning isn’t just about minimizing taxes; it’s about creating a lasting financial legacy that provides economic security for the next generation. Taking action now can help you make the most of the opportunities available to you before they potentially change.
Utilize Tax Loss Harvesting
Tax-loss harvesting is a popular and particularly effective strategy for managing your tax liability and optimizing your portfolio.
By selling investments that have declined in value, you can use the losses to offset taxable gains from other investments. If your total realized losses exceed your total realized gains, you can even offset up to $3,000 of ordinary income annually, and also carry forward any additional losses to use in future tax years.
This strategy can be particularly impactful when markets are volatile; however, timing is key. Many investors wait until the end of the year to harvest losses, only to find fewer opportunities or risk violating the wash-sale rule, which prevents you from repurchasing the same or a substantially identical investment within 30 days. A year-round approach to tax-loss harvesting makes sure that you’re capturing opportunities as they arise throughout the year, rather than scrambling to “loss harvest” only in December.
By integrating tax-loss harvesting into your overall financial plan, you can not only reduce your tax burden, but also keep your portfolio aligned with your investment goals. It’s a smart way to turn market challenges into advantages while staying proactive in managing your wealth.
Optimize Your Asset Location
Not all investments are created equal when it comes to taxes, and the type of account in which you hold them can significantly impact your overall returns. This is where asset location comes into play — a strategy that involves placing investments in accounts that offer the most favorable tax treatment for each asset class.
By aligning assets with the appropriate account types — taxable, tax-deferred, or tax-exempt — you can increase your after-tax returns, reduce tax liabilities, and support your portfolio’s longer-term financial growth.
For example, interest income from many bonds is typically taxed at ordinary income rates, while qualified dividends and long-term capital gains benefit from lower tax rates. Strategically positioning investments based on their tax characteristics allows you to optimize portfolio tax efficiency, and minimize the drag of taxes on your overall wealth.
Strategies for Effective Asset Location
- Tax-Advantaged Accounts: Hold tax-inefficient investments, such as taxable bonds and real estate investment trusts (REITs) in tax-deferred accounts like traditional IRAs or 401(k)s. This approach allows interest and dividends to grow without immediate tax implications.
- Taxable Accounts: Allocate tax-efficient investments, such as index funds and municipal bonds, to taxable accounts. These assets typically generate income that is taxed at lower rates or may be tax-exempt, reducing the overall tax burden.
Asset location can be an effective strategy when used correctly; however, it requires a thorough understanding of your financial profile, tax situation, and investment time horizon. Regular portfolio reviews and adjustments with your tax and financial advisor are essential to ensure that your asset location strategy remains aligned with your financial goals and changing tax laws.
Final Thoughts
As the year winds down and the promise of 2025 comes into view, now is the perfect time to take a proactive approach to your financial future. Taxes are an inevitable part of life and a “necessary evil,” but they don’t have to derail your plans.
By leveraging strategies like managing capital gains distributions, preparing for the TCJA expiration, considering Roth conversions, reviewing your estate plan, utilizing tax-loss harvesting, and optimizing asset location, you can reduce unnecessary tax burdens and position yourself for success in the year ahead.
The key to effective tax planning is preparation and thoughtful strategy. Small, intentional adjustments today can have a material impact on your longer-term financial health. Whether you’re focused on your portfolio’s tax efficiency, reassessing your retirement goals, or ensuring your legacy is protected for future generations, each move you make today is a step toward building greater stability in your retirement.
If navigating the complexities of these strategies feels overwhelming, remember that our counsel, care, and expertise are always within reach. At Towerpoint Wealth, we work with our clients year-round to optimize their portfolios for both their financial goals and tax considerations.
This holiday season, consider giving yourself the ultimate gift: economic peace of mind and a disciplined plan for the year ahead. If you want to make sure you’re covered for 2025 — and beyond — we encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us.
