How to Maximize Tax Deductions for the 2025 Filing Season

April 15 marks the IRS tax return filing deadline for 2025. Although this is the traditional tax filing deadline, given the spate of recent natural disasters (such as the California wildfires and Hurricane Milton), the IRS is granting certain filing and payment extensions beyond this date. A full list of tax provisions for states affected by natural disasters can be found here. 

For the majority of people, however, April 15th will remain the deadline. In this article, we’ll examine the most effective end-of-year tax strategies to help maximize your deductions and reduce your taxable income.

Table of Contents

1. Maximize retirement account contributions
2. Engage in tax loss harvesting
3. Defer income where possible
4. Accelerate tax deductions
5. Understand the Alternative Minimum Tax (AMT)
6. Account for the Kiddie Tax
7. Manage Required Minimum Distributions (RMDs)
8. Optimize FSAs and HSAs
9. Make the most of homeowner tax advantages
10. Additional year-end tax planning strategies
11. Consult a tax professional
12. FAQs

Maximize retirement account contributions

Contributions to tax-advantaged retirement accounts are among the most effective ways to reduce taxable income. These contributions not only provide immediate tax relief but help secure longer-term financial stability during retirement.

401(k) Plans: Contribute the maximum allowable amount for 2024: $23,000 if you’re under 50, or $30,500 if you’re 50 or older. At the very least, you should contribute enough to qualify for your employer’s full matching contribution, as this is essentially free money that you shouldn’t leave on the table.

Individual Retirement Accounts (IRAs): Contribute up to $7,000 for 2024 ($8,000 if aged 50+). Contributions made by April 15, 2025, can be applied to your 2024 return, reducing taxable income. You should decide whether a traditional IRA or Roth IRA is more advantageous based on your current and expected future tax brackets.

Engage in tax-loss harvesting

Tax-loss harvesting is a strategy that helps investors reduce their taxable income by leveraging losses in their investment portfolios. Tax-loss harvesting works by selling investments that have declined in value to offset gains from other investments or, in some cases, ordinary income. 

The realized losses from selling underperforming short- and long-term investments can be used, dollar-for-dollar, to offset capital gains from other short- and long-term investments.

If your losses exceed your gains, you can use up to $3,000 of excess losses to offset other income ($1,500 if married and filing separately). Any remaining losses can be carried forward to future years (although certain state restrictions may apply).

While tax-loss harvesting can be an effective way to increase your tax breaks—and balance your portfolio in the process—it’s important to observe IRS regulations regarding the strategy.

The IRS implements what’s known as the wash-sale rule, which prohibits you from buying a substantially identical security within 30 days before or after the sale of a loss-producing asset. It’s important to adhere to this rule or the IRS may not recognize your losses.

Defer income where possible

Strategically timing your income can have a major effect on your tax liability. Deferring income to a future year will allow you to reduce your current tax burden and keep more of your money working for you.

Effective ways to achieve this include:

For employees: If your employer offers this option, request that your year-end bonus be deferred to January 2026. This moves your taxable income to the next tax year, potentially lowering your tax bill for 2025.

For self-employed individuals: Consider delaying invoicing or billing clients so that payments are received beyond the current tax year. This can be particularly useful if you’re close to the top of your tax bracket, allowing you to defer income and remain in a lower bracket. 

Capital Gains: If you have appreciated investments, holding onto them until 2026 can help you defer taxable gains. This can be especially beneficial if you expect to be in a lower tax bracket in the following year.

Accelerate tax deductions

In much the same way that deferring income can reduce your taxable income, accelerating deductions can also reduce your tax bill. Charitable contributions and the prepayment and grouping together of certain expenses are effective ways to achieve deduction acceleration.

Charitable Contributions
Consider donating appreciated assets such as stocks or real estate. This allows you to avoid paying capital gains tax on the appreciation while still deducting the full market value of the asset, which can lead to major tax savings.

Be sure to keep thorough records, however, including receipts or acknowledgment letters for all charitable contributions. According to IRS guidelines, you must obtain written confirmation for donations over $250 from a charitable organization to claim a deduction. 

Qualified Charitable Distributions (QCDs) 

QCDs are direct transfers of funds from an individual retirement account (IRA) to a qualified charity. Available to taxpayers aged 70.5 or older, QCDs offer a strategic way to contribute to charity while meeting required minimum distribution (RMD) obligations. 

QCDs allow retirees to donate up to $100,000 per year from their traditional IRA directly to a charity, without incurring taxable income on the distribution. Reducing the IRA balance, QCDs help lower future required Minimum Distributions RMDs, providing a tax-efficient way to support causes that matter. 

Pay eligible bills early

Prepay state income taxes, property taxes, and medical expenses to maximize deductions in the current year. For example, if you expect high medical expenses, prepaying upcoming medical bills can make them eligible for deductions in 2025 if they exceed the threshold.

Bunching strategies
Bunching strategies are tax planning techniques used to maximize deductions by combining multiple years’ worth of deductible expenses into a single tax year. This is useful when the standard deduction is high, making it difficult to surpass the threshold for deductions.

 

Understand the Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to make sure that high-income earners pay at least a minimum amount of tax, regardless of deductions or credits they may otherwise claim. 

While AMT was created to target wealthier taxpayers who use loopholes to reduce their tax burden, it can unexpectedly impact middle-income taxpayers in the process. It’s important, therefore, to understand how AMT works to avoid any surprises during tax season. 

Disallowed deductions under AMT

AMT operates independently from the regular income tax system. While certain deductions, such as state and local income taxes and property taxes, can reduce your regular tax liability, they may not be recognized under AMT rules.

Planning Around AMT

If you anticipate being subject to AMT, prepaying deductible expenses like state income taxes or property taxes before the end of the year may not be advantageous. Since these deductions might not be allowed under AMT, prepaying them could result in unnecessary tax payments without a corresponding reduction in your overall tax burden.

Account for the kiddie tax

The kiddie tax is a set of IRS rules designed to prevent families from using a child’s lower tax rate to avoid taxes on unearned income, such as dividends or interest. For families with dependents under the age of 19 receiving unearned income (or 24, if they’re full-time students), these rules can create unexpected liabilities. 

Taxing unearned income: Investment income over $2,600 for children under 24 is taxed at the parents’ marginal tax rate.

Planning ahead: Carefully plan stock sales or gifts for dependents to avoid triggering higher tax rates.

Manage Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are mandatory withdrawals from certain retirement accounts, designed to stop individuals deferring taxes on these funds indefinitely. If you hold a traditional IRA or certain types of employer-sponsored retirement plans, understanding and managing RMDs is essential to avoid penalties and remain compliant with tax laws. 

Timing RMDs: Begin taking RMDs by April 1 of the year after you turn 73. Annual RMDs must be completed by December 31 each year to avoid penalties.

Penalties for missed RMDs: Failure to withdraw the required amount can result in a 25% penalty on the shortfall. This penalty is reduced to 10% if corrected within two years.

Roth IRA exemption: Roth IRAs are exempt from RMDs during the original owner’s lifetime, making them a valuable tool for tax-free growth and inheritance planning.

Optimize FSAs and HSAs

There are two primary types of tax-advantaged accounts, and it’s important to know the differences between them.

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts (FSAs) are employer-sponsored benefits that allow individuals to set aside pre-tax dollars for qualifying medical and dependent care expenses. Although FSAs can provide tax savings, they tend to operate on a “use-it-or-lose-it” basis, making it important to plan carefully for them. 

Year-end spending: Attempt to use any remaining funds for qualified medical expenses such as prescription eyewear, dental care, or medical supplies. This is a highly practical strategy as many FSA-approved products can be purchased online or at pharmacies.

Grace periods: Check if your employer offers a grace period, allowing you to spend unused funds until March 15, 2025. If no grace period exists, you’ll be limited to a December 31 deadline for these expenses.

Health Savings Accounts (HSAs) 

A Health Savings Account (HSA) is a tax-advantaged account designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. HSAs offer three distinct tax advantages:  

1. Contributions to an HSA are tax-deductible, reducing your taxable income. If made through payroll deductions, HSAs are pre-tax, offering additional savings.  
2. Any interest or investment earnings in your HSA grow tax-deferred, meaning they aren’t taxed unless the funds are used for non-qualified medical expenses.  
3. Withdrawals from an HSA are tax-free, so long as they are spent on eligible medical expenses, such as prescriptions, dental, and vision care.  

Using an HSA, individuals can lower their current tax liability while growing their savings for future healthcare needs.

Make the most of homeowner tax advantages

Owning a home comes with several tax benefits that can help reduce your overall tax liability as well as potentially increase the value of your property. 

Mortgage interest deduction: Deduct interest paid on mortgages up to $750,000 for primary or secondary homes—one of the largest tax advantages available for homeowners.

Property tax deduction: Deduct up to $10,000 in combined state and local taxes, including property taxes. However, be careful how this deduction may potentially interact with the Alternative Minimum Tax (AMT).

Energy Efficiency Credits: Homeowners who make energy-efficient upgrades, such as installing solar panels or energy-efficient windows, may qualify for valuable credits. The Residential Clean Energy Credit offers up to 30% back on installation costs, helping reduce both your tax liability and energy expenses.

Additional year-end tax planning strategies

As you approach the April 15th deadline, taking a few extra steps can help optimize your tax situation and keep you prepared for the filing season. 

Check eligibility for tax credits: Tax credits, such as the Earned Income Tax Credit (EITC), child tax credits, and education-related credits, directly reduce your tax bill. Research your eligibility to make sure you maximize these benefits and lower your overall tax liability.

Organize records and documentation:
Keep accurate records of receipts, invoices, and statements for any deductions and credits you plan to claim. This will not only help keep you compliant but keep the tax filing process smoother and prepare you for any potential audits.

Consult a tax professional

Most importantly, working with an experienced tax advisor can help you uncover opportunities you might otherwise miss. A tax advisor from Harness can help keep you compliant with the latest federal and state tax laws and offer personalized advice tailored to your specific financial situation.

 

FAQs

Get answers to the most common questions about tax deduction strategies and tax-advantaged accounts.

What is an FSA?

A Flexible Spending Account (FSA) allows employees to set aside pre-tax dollars for eligible medical or dependent care expenses, reducing taxable income. 

What are Required Minimum Distributions?  

Required Minimum Distributions (RMDs) are mandatory withdrawals from retirement accounts like IRAs and 401(k)s starting at age 73. RMDs are designed to make sure individuals pay taxes on their retirement savings, with penalties payable for missed RMD deadlines.

What is deferred income?  

Deferred income is income that is earned but not paid until a later date, allowing individuals to lower their current year’s taxable income. Common examples of deferred income include delayed salary bonuses or invoicing.

What is Alternative Minimum Tax?  

The Alternative Minimum Tax (AMT) is a separate tax system aimed at ensuring high-income earners pay a minimum amount of tax, regardless of deductions or credits. AMT bypasses certain regular tax deductions, and understanding its application helps taxpayers—particularly, high earners—plan effectively.

What is tax loss harvesting?  

Tax loss harvesting involves selling investments at a loss to offset taxable gains. This strategy can reduce taxable income by using losses to lower tax bills. Losses exceeding gains can offset up to $3,000 of other income, and any remaining losses can be carried forward to future years.

What is a QCD?  

A Qualified Charitable Distribution (QCD) allows individuals aged 70.5 or older to donate funds directly from their IRA to a charity, without paying taxes on the distribution. QCDs can count toward Required Minimum Distributions (RMDs), offering a tax-efficient way to support charitable causes while reducing taxable income.

What is the kiddie tax?  

The kiddie tax applies to unearned income, like dividends or interest, of children under age 19 (or 24 for full-time students). This income is taxed at the parents’ tax rate if it exceeds $2,600. Careful planning around gifts or investments for children can help avoid unexpected tax liabilities.

What are the tax benefits of owning a home?  

Homeownership provides major tax advantages, including deductions for mortgage interest, property taxes, and energy-efficient upgrades. Homeowners may also qualify for credits like the Residential Clean Energy Credit for energy-saving improvements, which can reduce both tax liability and energy costs.

What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals with high-deductible health plans (HDHPs). It allows you to save and pay for eligible medical expenses tax-free, with contributions being tax-deductible.

 

Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.