2025 Year-End Income Tax Planning — Last Chance for a Full Tax Benefit

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, primarily makes permanent many provisions of the Tax Cuts and Jobs Act (TCJA) that had been set to expire. However, it also introduces new rules that should be factored into year-end income tax planning.

For high-income taxpayers, two changes stand out: Beginning in 2026, the OBBBA will introduce permanent limitations on the deductions allowed for charitable contributions and permanent caps on the tax benefit received for all itemized deductions. That makes tax year 2025 the last opportunity to claim the full tax benefit of these provisions. An expanded state and local tax (SALT) deduction may be available in 2025 as well.

Key OBBBA Changes

• New charitable deduction floor: Beginning in 2026, charitable contributions will be deductible only to the extent they exceed 0.5% of income.
• New cap on itemized deductions: Starting in 2026, the tax benefit from all itemized deductions will be limited to 35%, down from 37% for those in the top bracket.
• Expanded SALT deduction (2025–2029 only): The deduction cap temporarily increases from $10,000 to $40,000, but this expanded benefit phases out beginning at $500,000 of income and is eliminated entirely at income of $600,000. Beyond this point, the $10,000 cap will apply. These amounts are halved for married taxpayers filing separately.

Planning Opportunities Before Year-End

Front-Load Charitable Contributions in 2025

With the upcoming cap on itemized deductions, this year presents a final opportunity for higher-income taxpayers to gain the full 37% tax benefit for charitable contributions.

As a result, you may want to consider front-loading several years of contributions into 2025. An effective approach is to use a donor-advised fund — deductible contributions can be made this year, while grants from the fund may be paid out in future years.

Donations of long-term appreciated securities (LTAS) often provide the greatest tax benefit to both donor and charity — allowing a full fair market value deduction while avoiding capital gains tax on the appreciation.

Pair Charitable Giving with a Roth IRA Conversion

Owners of traditional IRAs must take required minimum annual distributions (RMDs), which are taxed as ordinary income. Roth IRAs, however, are not subject to RMDs, and distributions are tax-free. Traditional IRAs can be converted into Roth IRAs through a simple process that requires including the amount converted in taxable income.

A powerful planning strategy involves offsetting this conversion income with a large, front-loaded charitable contribution to reduce or even eliminate the tax cost of the conversion.

Because Roth IRAs are not subject to RMDs, assets can continue to grow tax-free during the owner’s lifetime. Distributions to beneficiaries are also tax-free, although non-spouse beneficiaries must withdraw all funds within 10 years of inheritance.

Maximize SALT Deductions

Unlike most OBBBA provisions, the temporarily expanded SALT deduction is effective for 2025. For eligible taxpayers, this window may offer meaningful opportunities to increase deductibility — but, as noted above, the benefit phases out at higher income levels, making income planning especially important.

Income tax projections can help determine whether income levels will reduce or eliminate the expanded SALT deduction. If possible, lowering income — perhaps by realizing losses — may help achieve a larger deduction.

For traditional IRA owners age 70½ or older, a qualified charitable distribution (QCD) is another option. A QCD is a direct, tax-free transfer from a traditional IRA to a qualified charity. It counts toward RMDs and is not included in income. In 2025, the annual QCD limit is $108,000 per person.

If you’ve already taken RMDs in 2025, it may make sense to consider a QCD in 2026 to reduce income levels.

Note: The 35% itemized deduction cap does not apply until 2026, potentially making the SALT deduction more valuable in 2025.

Consider a Pass-Through Entity Tax (PTET) Election as a SALT Cap Workaround

In an effort to ameliorate the effects of the current TCJA SALT cap, 36 states and New York City have enacted PTET legislation. If you have significant flow-through income from partnerships, LLCs, or S corporations, a PTET election may offer a meaningful deduction opportunity. Although rules vary by state, a PTET election effectively shifts the state tax liability on flow-through income from the individual — where it is subject to the SALT cap — to the entity, where it is fully deductible. This has proven to be a highly effective workaround to the SALT deduction limits.

Evergreen Annual Income Tax Planning Considerations

The following strategies can be viewed as annual tax planning best practices. While many may involve relatively modest amounts in a single year, the cumulative impact over time can be significant.

• Fund a self-employed retirement plan if you have self-employment income, such as consulting fees or director’s fees. Contributions are deductible, and assets grow tax-deferred until distributed in retirement.
• Make a Roth IRA contribution, if eligible. If you have earned income and meet income limits, you can contribute up to $7,000 to a Roth IRA in 2025 ($8,000 if age 50 or older). If your income exceeds the limits, you may still be able to contribute via a backdoor Roth IRA. It may also be possible to fund an account for a nonworking spouse.
• Harvest capital losses. Selling investments at a loss can offset current-year realized capital gains. This is especially beneficial when offsetting net short-term capital gains.
• Donate long-term appreciated securities. Contributions of LTAS provide a fair market value deduction of up to 30% of adjusted gross income (AGI) while eliminating capital gains tax on the appreciation.
• Make qualified charitable distributions. If you are age 70½ or older, you may make tax-free IRA distributions of up to $108,000 per person in 2025. QCDs can satisfy RMDs while reducing AGI.

Annual Exclusion Giving Strategies

The annual gift tax exclusion for 2025 is set at $19,000 per recipient. Individuals may give this amount to as many recipients as they choose without incurring gift tax or using lifetime exemption amounts.

The following planning strategies can provide both income and transfer tax benefits. In all cases, the amounts transferred, plus any future growth, are excluded from the donor’s taxable estate. As always, annual exclusion giving strategies should be coordinated with your broader estate plan.

• Fund a Roth IRA (or backdoor Roth) for children or grandchildren with earned income. Contributions grow tax-free as RMDs do not apply to Roth IRAs. Qualified withdrawals are tax-free. Early funding allows more years for growth.
• Fund 529 plans for children or grandchildren. These tax-advantaged savings plans are designed to encourage saving for future education costs. Contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free. Many states provide an income tax deduction for a portion of contributions. A new rule also allows excess 529 assets to be rolled into a Roth IRA for the beneficiary.
• Superfund 529 plans. You may contribute up to five years’ worth of annual exclusion gifts to a 529 plan in a single year, treating it as a gift spread evenly over five years. This approach allows you to front-load a significant amount into the plan — potentially accelerating tax-free investment growth while removing more assets from your estate right away.
• Pay tuition and qualifying medical expenses for family members. Direct payments to educational institutions or medical providers are not considered taxable gifts.

A Final Word

As you engage in year-end planning, keep in mind that state tax rules may not conform to recent federal law changes. As a result, planning opportunities available at the federal level may not provide the same benefit in every state.

We hope you find this information helpful as you plan for year-end. Please contact your Bessemer advisor if you have any questions.