10 High-Income Tax Planning Strategies to Complete Before 2025: A Year-end Checklist

As the year comes to a close, now is the time to review potential financial moves that aim to minimize your tax burden heading into 2025. Proactive year-end tax planning can seek out significant savings and help you aspire to financial success in the new year.

Checklist: Year-end Tax Planning Strategies

Review the following tax strategies with your tax advisor and/or financial advisor before the end of the year.

1. Fully Utilize Tax-Advantaged Retirement and Savings Accounts
2. Leverage Tax-loss Harvesting
3. Gift Money to Friends and Family
4. Optimize Your Charitable Donations
5. Review Your Estate Planning
6. Consider Tax-Efficient Investment Allocations
7. Time Your Income Based on Tax Bracket Projections
8. Plan for Taxes on Crypto and Alternative Assets
9. Explore State Residency Tax Optimizations
10. Review Equity Compensation and Carried Interest

1. Fully Utilize Tax-Advantaged Retirement and Savings Accounts

There are multiple steps you can take using retirement accounts to target a reduction in your taxable income. Review the following strategies to see what works best for you as the year ends and as you plan for next year.

Contribute to Tax-Advantaged Retirement Accounts

Do your best to fully contribute to one or multiple tax-advantaged retirement accounts, such as 401(k), 403(b), or IRAs. Contributing to a traditional IRA or your company’s 401(k) allows you to reduce your current year’s taxable income, as these contributions are made with pre-tax dollars.

Roth IRAs are funded with after-tax dollars and cannot be deducted on a tax return, but they do offer tax-free growth and withdrawals during retirement.

• The 2024 contribution limit for a Roth IRA or traditional IRA is $7,000. For those over 50, the limit is $8,000.
• The 2024 contribution limit for a Roth 401(k) or Traditional 401(k) is $23,000. For those over 50, the limit is $30,500.

Note that for an IRA, you have until Tax Day of 2025 (April 15, 2025) to make any contributions for your 2024 taxes.

For business owners or those with non-W-2 business income

W-2 wage retirement contributions are limited by employer programs. However, for individuals who generate 1099 income from consulting, a small business, or other professional activities can capture tax savings from contributing significant portions of their net profits to tax-advantaged retirement accounts such as SEP IRAs or Solo 401(k)s.

• SEP IRA: The contribution limit for 2024 is 25% of an employee’s total compensation, up to $69,000.
• Solo 401(k): The maximum contribution as an employee is $23,000, plus an additional 25% of compensation as the employer, up to $66,000, or $73,500, including catch-up contributions for those over 50.

Consider a Backdoor Roth IRA

High-income earners who exceed Roth IRA income limits ($146,000 for a single filer in 2024) can consider a backdoor Roth IRA conversion by contributing to a traditional IRA and then converting it to a Roth IRA, which allows for tax-free growth and withdrawals. The conversion from a Traditional IRA to a Roth IRA is a taxable event, with income taxes due on any pre-tax contributions and investment earnings converted. However, once your funds are in a Roth IRA, they can grow and be withdrawn tax-free during your retirement.

Explore a Mega Backdoor Roth Strategy

Taking it one step further, a mega backdoor Roth is a more advanced strategy that can help high-income earners contribute even more to their retirement. This strategy applies specifically to employer-sponsored 401(k) plans and involves making after-tax contributions to the plan and converting these funds to a Roth 401(k) or Roth IRA.

A mega backdoor Roth allows you to contribute beyond the standard contribution limits, up to a maximum of $69,000 for 2024 (including employee contributions and any employer match). The steps typically involve:

• After-Tax Contributions: Make after-tax contributions to your 401(k) plan, if your employer’s plan allows it.
• In-Plan Conversion or Rollover: Convert the after-tax contributions to a Roth 401(k) within the plan or roll them over to a Roth IRA.

Not all employer-sponsored 401(k) plans permit after-tax contributions or in-plan Roth conversions. Be sure to check your plan’s provisions or speak with a qualified tax advisor.

Contribute to a FSA or Health Savings Account

If you have a qualifying high-deductible health plan (HDHP), you might consider contributing to a Flexible Spending Account (FSA) or Health Savings Account (HSA). Contributions can be deducted from taxable income, and withdrawals can be made tax-free from these accounts as long as funds are used for qualifying healthcare expenses.

• For 2024, the FSA contribution limit is $3,200.
• The HSA contribution limit for 2024 is $4,150 for an individual and $8,300 if your health insurance also covers your family.

HSAs give you an upfront deduction for the year of contribution, grow tax-free, and distribute tax-free, making them one of the most powerful tax-advantaged accounts.

Consider 529 Plans

A 529 Plan is a tax-advantaged investment account specifically designed to fund education costs. While they do not have annual contribution limits, a 529 is considered a gift to the beneficiary and is subject to gift tax annual exclusion limits.

529 plans’ tax advantages vary by state, and most states that offer tax benefits have a cap on the amount of contributions receiving the tax deduction. For instance, in New York State, the maximum contribution with state tax savings is $10,000 per year.

Frontloading 529 Contributions

Contributions to 529 plans can also be frontloaded or “superfunded”, allowing you to make up to five years’ worth of contributions in a single year without incurring gift taxes. For 2024, you can contribute up to $90,000 per beneficiary (or $180,000 if married filing jointly) using this strategy. This can be a particularly useful method for estate planning and maximizing tax benefits, as the funds grow tax-free when used for qualified education expenses.

529-to-Roth IRA Rollovers

Starting in 2024, beneficiaries of 529 College Savings Plans can roll over up to $35,000 over their lifetime into a Roth IRA, providing flexibility if education costs turn out to be less than anticipated.

Key points to consider:

• Holding Period: The 529 plan must have been open for at least 15 years before the rollover can occur.
• Contribution Limits: The amount rolled over is subject to annual Roth IRA contribution limits, so standard restrictions still apply.
• Beneficiary: The rollover must be made to the Roth IRA of the 529 plan’s beneficiary.

A 529-to-Roth IRA Rollover can alleviate concerns about overfunding a 529 plan, and offers another avenue for tax-advantaged savings.

2. Leverage Tax-loss Harvesting

Tax-loss harvesting involves selling investments that have declined in value to offset capital gains from other investments, thereby reducing the taxes you owe. While it’s not always advisable to sell investments at a loss, it may make sense in your situation to consider selling underperforming assets, especially if you’re willing to invest in alternative assets that provide similar exposure without triggering a wash sale.

Key Points to Consider:

• Offsetting Capital Gains: You can use capital losses to offset capital gains realized during the same tax year, which can lower your taxable income.
• Deducting Net Capital Losses: If your total capital losses exceed your capital gains, you can deduct up to $3,000 of net capital losses against your ordinary income per tax year ($1,500 if married filing separately). Any excess losses can be carried forward to future tax years.
• Retirement Accounts Excluded: Keep in mind that tax-loss harvesting cannot be used within retirement accounts such as IRAs or 401(k)s, as gains and losses within these accounts are tax-deferred or tax-exempt.

3. Gift Money to Friends and Family

Gifting funds to friends and family can not only help you support those close to you, it can also help reduce your taxable estate, making it an attractive option for those later in life or seeking to transfer wealth to children.

The annual gift tax exclusion amount for 2024 to individuals is $18,000, meaning you can gift $18,000 per individual without any federal tax being assessed. For a married couple, that means they can gift up to $36,000 per recipient per year with no tax consequences to the recipient. It is also permissible to pay certain expenses on behalf of others, such as tuition, without a tax consequence.

Use a 529 Education Account for Gifting

One especially beneficial way to gift funds is to invest in a 529 account. As mentioned earlier, 529 accounts can be used to pay qualifying educational expenses, including K-12 expenses and costs associated with college. Many states provide tax benefits for 529 contributions, and earnings from a 529 aren’t subject to federal tax when used to pay for eligible schooling-related costs.

Gifting Private Company Stock

If you hold private company stock with a low cost basis, you may want to consider giving that now, either directly or via a trust, to avoid any potential gift taxes or material usage of your lifetime gift exemption, which is the amount you can gift in your lifetime without incurring federal gift taxes. Note that gifting private company stock may require a professional appraisal to establish fair market value and ensure compliance with IRS regulations.

What is the Lifetime Gift Tax Exemption?

In 2024, the lifetime gift tax exemption is $13.61 million ($27.22 million if you are married filing jointly), up from $12.92 million in 2023. In 2025, the lifetime gift tax exclusion will rise to $13.99 million ($27.98 million if you are married filing jointly). However, by 2026, the exclusion amount will revert back to its pre-2018 level of about $5 million (or around $7 million adjusted for inflation) per individual, unless new legislation is passed, or the TCJA is extended.

4. Optimize Your Charitable Donations

Charitable contributions can help you support causes important to you, and can help you reduce your tax liability.

Qualified Charitable Distributions

If you’re over the age of 70, you may want to consider a Qualified Charitable Distribution (QCD). A QCD allows individuals 70 and a half and older to donate up to $100,000 directly from their Individual Retirement Accounts (IRAs) to a qualified charity without including the distribution in their taxable income. For individuals 73 years and older, QCDs can count towards a required minimum distribution (RMD).

Donor-Advised Fund

A Donor-Advised Fund (DAF) is a charitable giving account managed by a public charity, enabling donors to make contributions and receive a tax deduction immediately. After contributing, donors can suggest grants from the fund to support various charitable organizations over time. Donors can add cash, securities, or other assets to the DAF, transferring ownership to the fund while maintaining advisory rights over how the funds are invested and how grants are allocated to charities.

Contributions to a DAF are tax-deductible in the year they are made, potentially lowering the donor’s taxable income. Additionally, if the donation includes appreciated securities or assets, the donor may bypass capital gains taxes that would have been due if those assets were sold.

Donate Stock or Appreciated Assets

Another option is donating long-term appreciated stock to a non-profit. Donating appreciated stock directly to a charitable organization means you can avoid paying the capital gains tax, while supporting a cause meaningful to you. Additionally, you can claim the entire fair market value of the stock as a charitable donation instead of whatever’s left after paying the capital gains tax.

Charitable Remainder Trust

A Charitable Remainder Trust (CRT) is a type of irrevocable trust that allows an individual (the grantor) to receive income from the trust assets for a specified period, with the remainder of the assets going to the charity upon termination of the trust. A CRT allows the taxpayer to manage assets, have control over the timing of deductions, and support philanthropic goals.

Bunching Donations

One option if you wish to remain eligible for a deduction for donations is to bundle or “bunch” contributions. This would mean that instead of making smaller contributions over several years, you could make one large donation in one year so the amount of the donation exceeds the standard deduction. As the end of the year approaches, consider whether this strategy may make sense and whether this is a year you’ll itemize.

5. Review Your Estate Planning

The end of the year can also be a practical time to take stock of your long-term estate planning. Here are two ways to incorporate tax planning into your estate planning process.

Estate planning for strategic tax planning 

An example of estate planning for strategic tax planning to consider is Qualified Small Business Stock stacking (or QSBS stacking). QSBS provisions allow company founders and investors to exclude up to $10 million or 10 times the adjusted basis (whichever is greater) in gains from federal taxes when selling Qualified Small Business Stock, provided certain criteria are met. By gifting portions of QSBS to family members or trusts, each recipient can potentially claim their own exclusion, effectively multiplying the tax benefit.

Due to the complexity and costs involved in setting up trusts and maintaining trustees, consider working with a tax advisor or estate planning attorney on QSBS stacking.

Estate planning to preserve assets for beneficiaries

If your goal is to use estate planning to preserve assets for beneficiaries, consider utilizing a Grantor Retained Annuity Trust (GRAT). A GRAT can be beneficial if you want to transfer stock you think will appreciate significantly to someone else. With a GRAT, your gift to the trust is valued when contributed, regardless of appreciation. You receive an “annuity” from the trust—a small percentage of the initial amount each year for a series of years—and at the end, the balance goes to the recipient.

6. Consider Tax-Efficient Investment Allocations

Each year, it is beneficial to reassess your investment strategy to optimize for tax efficiency. The specific process is called “asset location” because you—and your financial and tax advisors—decide which type of account each of your investment assets should be “located” in.

Understanding Asset Location

Asset location is a strategy that involves placing different types of investments in specific accounts (taxable, tax-deferred, or tax-free) to minimize the overall tax burden and enhance after-tax returns. Here’s a breakdown of the asset location process:

1. Classify Investments and Account Types: Identify the tax characteristics of your investments (e.g., tax-efficient like stocks or tax-inefficient like bonds) and categorize your accounts (taxable, tax-deferred, or tax-free).
2. Assign Investments to Accounts for Optimal Tax Efficiency: Place tax-efficient investments (e.g., stocks, index funds) in taxable accounts, tax-inefficient assets (e.g., bonds, REITs) in tax-deferred accounts, and high-growth investments in tax-free accounts like Roth IRAs to maximize after-tax growth.
3. Monitor and Adjust for Tax Efficiency and Rebalancing: Periodically review and rebalance your asset location strategy to maintain your target asset allocation and adjust for any changes in tax laws or personal financial circumstances.

If you are already using asset location, the end of the year can be a good time to check in on your portfolio allocation to determine if rebalancing is needed.

7. Time Your Income Based on Tax Bracket Projections 

High-income individuals may have the option to control the timing of some of their income through deferred compensation, stock options, or bonus timing arrangements with their employer.

If this applies to you, consider analyzing your projected income and tax brackets for this year and the next to decide whether to accelerate income into a lower-tax year or defer it to a future year if you expect tax rates to decrease.

Deferred Compensation Plans

Nonqualified Deferred Compensation (NQDC) plans allow high-income earners to defer a portion of their income to a later date, such as retirement, when they may be in a lower tax bracket. Unlike qualified plans like 401(k)s, NQDC plans do not have annual contribution limits, making them a useful tool for higher-income individuals to manage large income deferrals. As an example, a high-income executive earning a large bonus may be able to defer the bonus into an NQDC plan, choosing to receive it as a series of payments after retirement, potentially reducing the tax impact as they draw lower amounts over time in a lower tax bracket.

Timing of Bonuses and Commissions

High-income individuals who receive significant bonuses or commissions may also have flexibility in timing these payouts, depending on their arrangement with their employer. In this scenario, one may be able to shift a bonus to the following calendar year, deferring the income and taxes to a year when they would potentially expect to be in a lower tax bracket.

For example, if a bonus is set to be paid at the end of 2024, and you anticipate a lower tax rate in 2025 due to upcoming income changes, you could consider requesting to receive the bonus in January 2025, which would help to lower your 2024 tax liability and deferring income until the lower-tax year.

Deferred compensation is a complex subject. If you are interested in leveraging this strategy, consider working with a tax advisor from Harness today.

Capital Gains Management

Managing capital gains is essential for those with investments in appreciated assets, such as stocks, real estate, or a business. The timing of asset sales can have a large impact on taxes owed, given the taxable differences in long-term versus short-term capital gains. If taxes are expected to rise, investors may choose to realize capital gains now to lock in lower rates. Conversely, if they expect rates to drop or find themselves in a high-income year, they may consider deferring a sale until a lower-tax year. Lastly, it’s important to remember that tax-loss harvesting can be a useful tool in leveraging capital losses for tax savings.

8. Plan for Taxes on Crypto and Alternative Assets

If you’ve made investments in crypto, NFT, or other alternative assets this year, ensure you review your transactions and have an accurate record of your activities. Without a thorough understanding, crypto transactions can surprise investors with unexpected tax bills.

Know What Triggers Crypto Taxes

You should ensure you are aware of when taxes may have been triggered on your investments. For example, if you send funds to a liquidity pool, your distributions, while in the fund, are subject to taxation. Similar to traditional assets, you also want to be aware of any losses that can offset other gains via tax-loss harvesting.

Expect to pay ordinary income tax if you’re earning crypto through a job or another professional activity, including:

• Employee or freelance wages paid in crypto
• Earning new tokens from liquidity mining
• Earning tokens from yield farming
• Interest earned from DeFi lending

Expect to pay capital gains tax if you’re trading or using crypto for transactions, including:

• Swapping a token for a different token on a DeFi exchange
• Spending crypto to buy goods or services
• Removing crypto from liquidity pools
• Selling or converting crypto into fiat

For a more detailed dive into crypto taxes, see our guide: Crypto Taxes in the US: A Guide for 2024

9. Explore State Residency Tax Optimizations

If you work remotely, travel frequently, or are considering a move, your state of residency can significantly impact your tax obligations. State income tax rates vary widely across the U.S., ranging from no income tax at all to rates exceeding 13%. Understanding your state tax exposure and considering the impact of your state residency or domicile can be meaningful.

Understanding Domicile vs. Residency

• Domicile: Your domicile is your primary, permanent home—the place you intend to return to and remain indefinitely. You can have only one domicile at a time.
• Residency: You can be considered a resident in multiple states for tax purposes if you spend a significant amount of time there or have income sourced from that state.

Changing your state residency can offer significant tax advantages, but the process requires careful planning and documentation. Be proactive in taking the necessary steps to establish domicile in your new state while severing ties with your former state.

Before making any moves, consult with a tax advisor to understand the implications and ensure compliance with all legal requirements.

10. Equity Compensation and Carried Interest Planning

For those involved in startups, private equity, hedge funds, or venture capital, year-end is a crucial time to assess how equity compensation and carried interest taxation can impact your tax planning.

Equity Compensation Tax Planning

Equity compensation, such as Incentive Stock Options (ISOs) and Restricted Stock Units (RSUs), offers significant financial opportunities but comes with complex tax implications. Year-end is the ideal time to assess your equity compensation strategies to minimize taxes and avoid unexpected liabilities.

• Calculate your projected AMT liability before year-end: Exercising ISOs can trigger the Alternative Minimum Tax (AMT). The difference between the grant price and the fair market value at exercise is considered an adjustment for AMT purposes. A substantial “bargain element” might push you into a higher tax bracket than anticipated.
• Consider a Section 83(i) Election: If you received Qualified Equity Grants (QEGs) from a private company, you might defer income taxes for up to five years by making a Section 83(i) election. This election is available for qualified employees who receive stock options or RSUs in eligible corporations.
• Coordinate Timing to Avoid Wash Sale Rules: The wash sale rule disallows claiming a loss on the sale of a security if you purchase the same or a “substantially identical” security within 30 days before or after the sale. Violating this rule means you cannot claim the tax deduction for the loss, yet you’ll still incur the actual financial loss.
• Plan Cash Needs for Tax Obligations: Evaluate your cash flow to accommodate potential tax payments. Consider strategies like a same-day sale (exercise and immediate sale of shares) to generate funds needed for taxes, though this may forgo potential future appreciation.

To avoid unintended tax consequences, coordinate the timing of your equity transactions carefully. Consult with a tax advisor to develop a strategy that aligns with your financial goals while complying with IRS regulations.

Carried Interest Tax Planning

Carried interest represents a share of a fund’s profits allocated to investment managers, often taxed at favorable capital gains rates if certain holding periods are met. Year-end is an optimal time to evaluate how carried interest taxation and holding periods affect your tax planning.

• Review Holding Periods: Ensure that investments linked to carried interest meet the three-year holding period required for long-term capital gains treatment, as this differs greatly from the one-year holding period for stocks.
• Plan Asset Sales Accordingly: If an asset is approaching the three-year mark, consider holding off on selling until the holding period is satisfied to benefit from lower tax rates.
• Stay Informed on Tax Legislation: Potential changes to tax laws could impact carried interest taxation. Being aware allows you to make informed decisions now.

Addressing these considerations before year-end ensures you can take necessary actions within the current tax year, potentially reducing your tax liability and aligning your investments with your financial goals.

Find Your Tax Advisor at Harness

If you need help navigating tax questions around these topics, including equity compensation, business ownership, self-employment, or other unique tax situations, Harness can help you navigate tax planning, compliance, and filing. 

The right tax advisor will partner with you to understand your situation and optimize your tax strategy. From comprehensive tax planning to tax preparation, we’ll connect you with a tax advisor who has the experience to meet your specific needs. Get started with Harness today.

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