As tax policy continues to evolve amidst growing national debt, taxpayers may face higher taxes in the future. The expiration of provisions under the Tax Cuts and Jobs Act (TCJA) at the end of 2025 adds to the uncertainty, with Congress considering potential extensions. While predicting future tax rates remains difficult, it’s wise to take proactive steps now to manage your tax obligations and prepare for any changes. By assessing your finances early, you can implement tax-efficient strategies that could benefit you in 2025 and beyond. Below are five strategies to consider for optimizing your tax savings this year.
1. Leverage Roth IRA Conversions
One way to manage future tax uncertainty is by converting Traditional IRA assets to a Roth IRA. This strategy allows you to pay taxes at today’s rates, which are currently lower than many experts predict they might be in the future. Roth IRA conversions offer long-term benefits, including tax-free growth and the absence of the 3.8% Medicare surtax on Roth IRA income. Additionally, qualified distributions from a Roth IRA do not count toward the $200,000 threshold for surtax eligibility ($250,000 for married couples).
However, Roth conversions should be approached with caution. Once a conversion is made, it cannot be undone, so it’s important to carefully assess whether the conversion makes sense based on your current and expected future tax rates. It is especially beneficial for those who anticipate being in a higher tax bracket in the future. For some individuals, a Roth IRA conversion may not be the best option if they expect to be in a lower tax bracket during retirement.
2. Alternative Ways to Fund Roth IRAs
For high-income taxpayers who are prohibited from contributing directly to Roth IRAs, there are alternative strategies. For example, individuals can make non-deductible (after-tax) IRA contributions and then convert these funds to a Roth IRA. Unlike direct contributions, there are no income limits for conversions. However, the pro-rata rule applies when converting IRAs that contain both pre-tax and after-tax funds. This rule requires the amount converted to include a proportional mix of both types of funds, which may result in unintended tax consequences.
Additionally, some 401(k) plans allow participants to make after-tax contributions beyond the salary deferral limit. These after-tax contributions can be rolled over into a Roth IRA without incurring income taxes, provided that a triggering event occurs, such as a job change or retirement. This strategy allows high-income earners to effectively diversify their tax exposure in retirement.
3. Consider Itemizing Deductions in Alternate Years
With the increased standard deduction under recent tax reforms, fewer taxpayers are choosing to itemize. However, some taxpayers can benefit by alternating between claiming the standard deduction one year and itemizing in another. This strategy, known as “bunching” deductions, allows taxpayers to maximize their deductions in the years when they itemize. For instance, by making large charitable contributions in one year or scheduling medical expenses to fall within a specific year, you can increase the total amount deducted and reduce your taxable income.
By carefully timing your deductions, you can increase the potential tax savings from itemizing, even though the standard deduction may be the better option in other years.
4. Take Advantage of Charitable Contributions from IRAs
For individuals aged 70½ and older, making charitable donations directly from an IRA can be an effective way to reduce taxable income without the need to itemize. The IRS allows qualified charitable distributions (QCDs) of up to $108,000 in 2025, including the required minimum distribution (RMD), and the funds donated will not be included in your taxable income. The donation must be made directly to a qualified charity, and distributions to donor-advised funds or private foundations are not eligible for this tax benefit.
This strategy is particularly useful for individuals who are subject to RMDs and wish to reduce their taxable income while supporting charitable causes. By taking advantage of QCDs, you can lower your adjusted gross income and avoid triggering higher Medicare Part B premiums in retirement.
5. Maximize the Qualified Business Income (QBI) Deduction
The 20% deduction for qualified business income (QBI), introduced under the 2017 tax reform, is available to owners of pass-through businesses such as sole proprietorships, partnerships, LLCs, and S corporations. This deduction allows business owners to reduce their taxable income, but it is subject to certain income limits. The deduction phases out for businesses classified as specified service trades or businesses (SSTBs), which include fields such as health care, law, accounting, and consulting, once taxable income exceeds $197,300 for single filers ($394,600 for married couples).
For taxpayers whose businesses are impacted by the phaseout, strategies such as funding retirement accounts, deferring income, or accelerating business expenses can help reduce taxable income. It’s essential to plan ahead to ensure you take full advantage of the QBI deduction and mitigate any potential tax liabilities.
Consult a Professional for Tailored Advice
Each taxpayer’s situation is unique, and the strategies outlined above may not be suitable for everyone. Before making any decisions, it’s important to consult with a qualified tax or financial advisor who can help you navigate these complex tax planning strategies. A professional can provide personalized advice based on your goals, financial situation, and potential tax risks.
By taking a proactive approach to tax planning, you can reduce your tax burden today and position yourself for future savings. Regardless of potential changes to tax policy, smart planning today can help you maximize savings and minimize future tax liabilities.
