Introduction
As the year comes to a close, taxpayers have limited time to take advantage of tax-saving strategies that can significantly reduce their tax liability. Whether you are an individual, freelancer, or business owner, planning ahead can help maximize deductions, credits, and other tax benefits.
This guide outlines effective ways to legally lower your tax bill before the year ends, including contributions, deductions, and tax-efficient investments.
Maximize Retirement Contributions (IRC §401 & §408)
- Contributions to tax-advantaged retirement accounts reduce taxable income.
- The 401(k) contribution limit for 2025 is $24,000 ($30,500 if age 50+).
- The IRA contribution limit is $7,500 ($8,500 if age 50+).
Action Step:
- Max out 401(k), IRA, or Roth IRA contributions before December 31.
- Use Form 8880 (Saver’s Credit) if eligible for additional tax savings.
- Make Charitable Donations (IRC §170)
- Donations to qualified charities are tax-deductible if you itemize deductions.
- Contributions must be made before December 31 to count for the current tax year.
- If donating non-cash items, keep a receipt and use Form 8283 for donations over $500.
Action Step:
- Donate to 501(c)(3) charities and keep receipts or acknowledgment letters.
- Consider donating appreciated stocks to avoid capital gains tax.
Use Tax-Loss Harvesting for Investments (IRC §1211 & §1212)
- Selling investments at a loss offsets capital gains and reduces taxable income.
- Up to $3,000 in capital losses can offset ordinary income per year.
Action Step:
- Sell underperforming stocks to offset capital gains before December 31.
- Report gains/losses on Schedule D (Form 1040) and Form 8949.
Prepay Certain Expenses for Additional Deductions
- Paying property taxes, mortgage interest, or medical expenses before year-end increases deductions.
- Business owners can prepay rent, subscriptions, or advertising expenses.
Action Step:
- Consider prepaying deductible expenses if itemizing on Schedule A (Form 1040).
Defer Income to Next Year (IRC §451)
- Deferring income can push taxable earnings into the next tax year, reducing the current year’s tax liability.
- Self-employed individuals and businesses can delay invoicing clients to recognize income next year.
Action Step:
- If close to a higher tax bracket, defer bonuses or client payments until January.
Take Advantage of Business Deductions (IRC §162 & §179)
- Self-employed individuals can deduct business expenses, equipment, and home office costs.
- Section 179 deduction allows businesses to write off up to $1.22 million in equipment purchases.
Action Step:
- Buy business equipment, office supplies, and software before year-end.
- Use Form 4562 to claim depreciation deductions.
Pay Estimated Taxes to Avoid Penalties (IRC §6654)
- If self-employed or have significant investment income, make estimated tax payments to avoid IRS penalties.
- The final quarterly tax payment for 2025 is due January 15, 2026.
Action Step:
- Pay estimated taxes using Form 1040-ES before December 31.
Use Health Savings Accounts (HSA) & Flexible Spending Accounts (FSA) (IRC §223 & §125)
- Contributions to an HSA or FSA are tax-deductible and lower taxable income.
- The 2025 HSA contribution limit is $4,150 for individuals and $8,300 for families.
- FSA funds must be used by December 31 or may be forfeited.
Action Step:
- Max out HSA contributions (Form 8889) and use FSA funds before the deadline.
Claim the Earned Income Tax Credit (EITC) (IRC §32)
- Low-to-moderate-income taxpayers may qualify for the Earned Income Tax Credit.
- The maximum EITC for 2025 is projected to be $7,500 for taxpayers with three or more children.
Action Step:
- Use Schedule EIC (Form 1040) to determine eligibility.
Review Tax Withholding and Adjust W-4 (IRC §3402)
- If you expect a large tax bill or refund, adjust withholding on Form W-4 to match your expected liability.
Action Step:
- Update Form W-4 with your employer before year-end to avoid surprises at tax time.
Common Mistakes to Avoid
- Failing to max out retirement contributions before the deadline.
- Forgetting to itemize deductions when they exceed the standard deduction.
- Not making estimated tax payments, leading to IRS penalties.
- Overlooking charitable donation documentation, which is required for tax deductions.
Frequently Asked Questions (FAQs)
1. What is the best way to reduce my tax bill before the year ends?
Maximize retirement contributions, charitable donations, and business deductions before December 31.
2. Can I deduct medical expenses on my taxes?
Yes, but only if medical expenses exceed 7.5% of adjusted gross income (AGI) and you itemize deductions.
3. Does donating to charity really lower my taxes?
Yes, charitable donations are deductible if you itemize and give to a qualified 501(c)(3) organization.
4. How can small business owners lower their tax liability?
By deducting business expenses, prepaying costs, and taking advantage of Section 179 depreciation.
5. Do I need to itemize to deduct mortgage interest?
Yes, mortgage interest is deductible only if you itemize deductions on Schedule A (Form 1040).
Conclusion
Year-end tax planning is crucial to reducing your tax bill and maximizing deductions. By making retirement contributions, prepaying expenses, donating to charity, and using tax-advantaged accounts, you can lower your taxable income and keep more money in your pocket.
For expert tax planning, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.
About Our CPA
Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and an Enrolled Agent admitted to practice before the IRS. He specializes in tax reduction strategies, business tax planning, and IRS compliance.
Disclaimer
This article is for informational purposes only and should not be considered legal or tax advice. Tax laws change frequently, and every individual’s financial situation is unique. Consult a qualified CPA or tax professional before making tax-related decisions.