If no legislation is passed, tax rates are changing in 2026.
That means you have the end of this year and next year with these current tax rates.
Knowing that tax rates are lower and wider now, how will that affect you? Should you proactively be doing tax planning this year?
The answer is yes!
Tax planning should be done year-round, particularly near the beginning of the year, but if you did not do it, now is your opportunity to do your own tax planning. Don’t be the person who finds out in 2025 that they paid the IRS too much for 2024!
Although many people focus on current year taxes, and we’ll talk about that below, good tax planning looks at your lifetime tax liability and develops strategies to minimize the amount you pay throughout life.
Here are 7 ideas to consider before the end of the year to strategically reduce the taxes you pay over your lifetime.
Tax Planning Checklist Step 1: Complete Required Minimum Distributions (RMDs)
Please don’t forget to distribute your RMD. The penalty is steep at 25% of every dollar that should have been distributed. If you catch it within two years, you can potentially get the penalty reduced from 25% to 10%.
RMDs now start at age 73 or 75, depending on your year of birth.
For those with a birth year of 1951 to 1959, RMDs will begin at age 73. For those born in 1960 or later, RMDs will begin at age 75.
If you’ve already been distributing RMDs, you should continue taking your RMDs.
If you have an RMD you need to complete before December 31, don’t wait until the last minute to do it!
Custodians get very busy near the end of the year, and family is often in town. I’ve seen many people trying to distribute their RMD during the last week of the year, which is painful to hear, knowing the penalty for not completing an RMD is 25% of the amount that should have been distributed.
For example, if your RMD is $50,000, the penalty for not distributing your RMD by December 31 would be $12,500. This makes it a very important step on the checklist because the penalty can be significant! The penalty can be reduced down to 10% if you take it within a “correction window” (typically within the end of the second calendar year following the year the RMD should have been distributed), but even that would mean a $5,000 penalty based on an RMD of $50,000.
Do you want to give the IRS additional funds?
I didn’t think so.
For those starting RMDs for the first time in 2024, you have the option to wait until next year, but that’s not always the smart decision. For people who begin RMDs for the first time in 2024, your first RMD would be due by April 1 of 2025; however, if you wait until 2025, you’ll have two RMDs to complete in 2025. Depending on your tax situation, you may want to complete it in 2024.
What happens if you don’t need the RMD?
You don’t need to spend it. You could reinvest the proceeds into a taxable brokerage account. You can contact your custodian to move cash between your IRA and brokerage account where you can invest it for other purposes.
If you plan to invest the RMD proceeds in the future, you may want to consider moving it to your brokerage earlier in the year, where the tax treatment is generally better. If you take the RMD amount and invest it into your brokerage account and the market goes down, you can tax-loss harvest. If the market goes up, you will get capital gains treatment on the future sale instead of ordinary income treatment. Capital gains tax rates are generally lower than ordinary income tax rates.
Qualified Charitable Distributions (QCDs)
Another option if you don’t need the RMD or are charitable inclined is to give the money to charity. You could do a Qualified Charitable Distribution (QCD). QCDs are one of the best ways to give because for each dollar you give up to $105,000 per year, the distribution is not taxable and can satisfy your RMD.
For example, if your RMD is $40,000 and you distribute $10,000 as a QCD, only $30,000 is taxable to you. If you distribute $40,000 as a QCD, none of it is taxable. You can distribute more than your RMD as a QCD (up to $105k), but it does not carry forward to satisfy your RMD for the following year. If you distribute more, you reduce the balance in your retirement account, which could make future RMDs smaller.
Inherited IRAs
If you have an Inherited IRA or Inherited Roth IRA, regardless of your age, you may need to complete a RMD. The distribution rules are complicated and vary depending on many factors.
Generally, for account owners who died in 2020 or later, the account needs to be distributed by December 31 of the 10th year after the year in which the account holder died. Depending on if you were a designated beneficiary or a non-designated beneficiary and if the decedent died prior to or after their required beginning date dictates when and how RMDs are distributed. This Kitces article summarizes the rules of Inherited IRA RMDs well.
Some people can “stretch” distributions, some need to follow the 10-year rule and “stretch” distributions, some can follow the 10-year rule only, and some will follow the 5-year rule.
It’s a complicated mess, so I recommend reading the rules closely and working with a professional as needed.
Thankfully, the IRS issued Notice 2024-35, Notice 2023-53, and Notices 2022-53, which waived the RMD requirement for years 2021 through 2024 while they sorted out the uncertainty we had during the past few years about whether an Inherited IRA RMD needed to be taken during the 10-year window for certain beneficiaries.
Even though an Inherited IRA RMD may not be required this year, beneficiaries may still want to consider distributing an Inherited IRA RMD this year if they find themselves in a lower bracket than they may be in the future. Stretching that income over multiple years may be more beneficial than taking larger distributions to get it out by the 10th year, particularly considering that tax rates are due to sunset at the end of 2025.
If the account owner died prior to 2020, distributions can generally be stretched over your lifetime using the Single Life Expectancy table. If you are already following those rules, you have it simpler compared to the rules now.
Please keep in mind that distribution rules are complicated, and your situation is unique. You should consult your tax advisor or financial planner about your individual situation to determine how to take distributions that not only satisfy the rules, but help reduce taxes over your lifetime.
Tax Planning Checklist Step 2: Analyze Opportunities for Roth Conversions
Analyzing opportunities for Roth conversions is a huge tax planning idea this year.
You may want to consider a Roth conversion before the end of the year. Unlike contributions, which can be contributed until your tax filing deadline (not including extensions), Roth conversions have to be done in the calendar year for them to count in that year’s income.
There is only this year and next to take advantage of the lower tax rates created by the Tax Cuts and Jobs Act.
The current rates, which are lower and wider, are due to sunset at the end of 2025, which means starting in 2026, we’ll be back to the 2017 tax rates adjusted for inflation. Those tax rates are higher and narrower. In other words, if your income is the same, it may be taxed at higher rates.
Below are the 2024 and 2017 tax brackets for you to see how much lower the tax rates are today.
| Married Filing Jointly 2024 Tax Brackets | Married Filing Jointly 2017 Tax Brackets | ||
| Taxable Income | Tax Bracket: | Taxable Income | Tax Bracket: |
| $0 – $23,200 | 10% | $0 – $18,650 | 10% |
| $23,201 – $94,300 | 12% | $18,651 – $75,900 | 15% |
| $94,301 – $201,050 | 22% | $75,901 – $153,100 | 25% |
| $201,051 – $383,900 | 24% | $153,101 – $233,350 | 28% |
| $383,901 – $487,450 | 32% | $233,351 – $416,700 | 33% |
| $487,451 – $731,200 | 35% | $416,701 – $470,700 | 35% |
| $731,200+ | 37% | $470,701+ | 39.6% |
| Single 2024 Tax Brackets | Single 2017 Tax Brackets | ||
| Taxable Income | Tax Bracket: | Taxable Income | Tax Bracket: |
| $0 – $11,600 | 10% | $0 – $9,325 | 10% |
| $11,601 – $47,150 | 12% | $9,326 – $37,950 | 15% |
| $47,151 – $100,525 | 22% | $37,951 – $91,900 | 25% |
| $100,526 – $191,950 | 24% | $91,901 – $191,650 | 28% |
| $191,951 – $243,725 | 32% | $191,651 – $416,700 | 33% |
| $243,726 – $609,350 | 35% | $416,701 – $418,400 | 35% |
| $609,350+ | 37% | $418,401+ | 39.6% |
If you are in the 22% or 24% marginal tax bracket, it’s a particularly good time to analyze whether a Roth Conversion makes sense because those in the 22% tax bracket today may find themselves in the 25% tax bracket and those in the 24% tax bracket may find themselves in the 28% tax bracket in 2026.
Roth conversions don’t make sense for everybody. You’ll need to consider your IRA balance, future income, how your investments are structured, and how much you want to hedge against higher tax rates in the future.
For example, Social Security income is taxable somewhere between 0% and 85%. If you have low enough income due to early retirement or collecting a lower Social Security amount, such as a widow benefit while waiting for your own benefit to grow larger, only part of your Social Security may be taxable, which means a Roth conversion may not be appropriate. There are cases where a Roth conversion means paying a tax rate of over 40% on a portion of the income. Below is a visual.
Generally, if you have more than $750,000 in a retirement account and are 73 or younger, you may want to explore Roth conversions with a financial planner or accountant by comparing your current year tax bracket to a future estimated tax bracket. If you already started RMDs, but find yourself in the 22% or 24% tax bracket, there may still be an opportunity to convert and potentially pay less in taxes than in the future. There are cases where converting in the 32% tax bracket makes sense given heirs tax rates and estate taxes.
If you can pay a lower tax rate now than you anticipate paying in the future, it may make sense to do a Roth conversion.
Tax Planning Checklist Step 3: Proactively Tax-Gain and Tax-Loss Harvest
Paying nothing in taxes is usually not a good thing. It usually means a missed planning opportunity that costs you thousands of dollars or more.
It’s like going to a five-course meal and only staying for the first three-courses. You may have loved the food, but you already paid for five-courses and missed out on some of the benefit.
Many people don’t understand how ordinary income affects capital gains, and vice versa.
Most people are familiar with ordinary income tax rates because it’s how most of us are taxed while working. If you earn $100 while working, you have $100 of ordinary income. When someone retires or is no longer earning as much ordinary income, they generally fall into a lower income tax bracket, but they also fall into a lower capital gains bracket — sometimes even 0%.
Capital gains are recognized when you sell an investment for more than what you bought it for in a non-retirement account. For example, if you bought a stock for $10 and sold it for $30 in a brokerage account, you would have $20 worth of capital gains.
The way ordinary income tax rates and capital gains tax rates are connected is that capital gains are stacked on top of ordinary income.
Example of how capital gains are stacked on top of ordinary income
What this means is that your capital gains tax rate can go up or down depending on your ordinary income, but your capital gains are always taxed at their own capital gains tax rate – not ordinary income tax rates.
Long-term capital gains tax brackets are the following:
| Capital Gains Tax Rate | Married Filing Jointly Taxable Income | Single Taxable Income |
| 0% | $0 – $94,050 | $0 – $47,025 |
| 15% | $94,051 – $583,750 | $47,026 – $518,900 |
| 20% | $583,751 or more | $518,901 or more |
Example 1 of 0% Capital Gains Bracket – No Income
Let’s look at an example to clarify.
Let’s say you retired, and for simplicity, you earn no income and take the standard deduction ($29,200) as a married couple.
If you do nothing, you’ll pay $0 in taxes, but you missed out on using your standard deduction. It was wasted. You could have had $29,200 in income and still paid $0 in taxes because it would have been fully offset by your standard deduction.
In the case of capital gains, you could have realized $123,250 in long-term capital gains and paid $0 in taxes. Yes, you heard me right.
You could have realized $123,250 in long-term capital gains and paid nothing in taxes.
How does that work?
Remember, ordinary income has its own tax bracket. Capital gains get stacked on top of ordinary income and are taxed at their own rate.
Example 2 of 0% Capital Gains Bracket – $40,000 Income
Let’s take it a step further and say you have $3,000 of taxable interest and $45,000 of ordinary income from part-time work.
In this case, your gross income is $48,000. Your taxable income is $48,000 minus the $29,200 standard deduction, bringing it to $18,800.
Your total income tax is $1,880.
If you do nothing, you are still missing out on the opportunity to recognize long-term capital gains and pay zero tax on those capital gains.
Example 3 of 0% Capital Gains Bracket – $45,000 Income and $75,250 of Long-Term Capital Gains
You could recognize $75,250 in long-term capital gains and still be in the 0% capital gains tax bracket. Let’s go over the math.
$3,000 of taxable interest
+ $45,000 of ordinary income
+ $75,250 of long-term capital gains
= $123,250 of gross income
– $29,200 standard deduction
= $94,050 taxable income
The $94,050 figure is the top of the 0% capital gains bracket. You can do your own calculations using this calculator.
If you already had taxable income of $94,050 from ordinary income, your capital gains will get stacked on top and be taxed at 15%.
But, as long as you have lower income and can fill up the 0% capital gains tax bracket, you should consider taking advantage of recognizing income if it results in not paying additional taxes.
Importance of Mock Tax Projections
You should be aware that capital gains can affect the taxation of other sources of income, such as Social Security. To ensure you are not raising your taxes while still being in the 0% capital gains bracket, you should do a mock tax projection to see how your tax liabilities change if you recognize capital gains.
Mechanics of Tax-Gain Harvesting
The mechanics of tax-gain harvesting are easy. You simply need to sell an investment or part of an investment with a long-term capital gain and then buy it back immediately. You don’t need to wait like with tax-loss harvesting.
You could sell “Investment A” today and buy “Investment A” back a second later.
Tax-Loss Harvesting
The other tax planning opportunity to double check before year-end is if you have tax-loss harvesting opportunities. If an investment went down in value, you could sell it at a loss to recognize the loss, and use that loss to offset other gains. If you don’t have gains, you can offset up to $3,000 of ordinary income per year. Ideally, you should proactively be doing this throughout the year and not just at the end of the year.
As losses occur, you usually want to take them.
It’s best practice to monitor losses throughout the year and if a loss is meaningful, sell the position and replace it with a similar investment. After 31 days, you may want to swap back to the original investment if there is not a huge gain. If there is a huge gain or the substitute investment is good enough, you may want to keep the similar investment.
Tax Planning Checklist Step 4: Complete Charitable Giving
Please don’t wait until the last week of December to decide to give to charity.
Review it earlier and ask yourself:
- Have you supported the charities you intended?
- Did you give the amounts you wanted?
- Do you want to set up recurring donations?
- Have you considered giving more unrestricted funds?
- Did you give cash or pay by credit card when another method would be more tax efficient?
Although QCDs are a great way for those who are 70 1/2 or older to give, another option to consider is a Donor-Advised Fund (DAF).
It’s similar to a brokerage account, but it can only be used for charitable giving. Once you make a gift to a DAF, it’s irrevocable.
While you can contribute cash to a DAF, a better method is usually to donate highly appreciated investments that have been held longer than a year. One common way of using a DAF is to bunch a few years worth of gifts into one year and give it out over time.
For example, you could contribute $20,000 worth of an individual investment you bought for $5,000. By donating it, you avoid the $15,000 capital gain and still receive a charitable deduction of $20,000. Plus, the funds can be invested in the Donor-Advised Fund and you can request grants to charities you would normally support. A grant is simply a request to the sponsoring organization to write a check from your Donor-Advised Fund to the charity of your choice.
Whether you use a Donor-Advised Fund or another method of giving, don’t forget to review your charitable giving for the year.
Tax Planning Checklist Step 5: Review Contributions to Tax-Advantaged Retirement Accounts
If you are still working and want to max out your retirement contributions, check that your last paycheck or two will contribute enough to your retirement account to equal $23,000. If you are over age 50, you can make a $7,500 catch up contribution for a total of $30,500.
If you have access to an HSA, consider making contributions of $4,150 for self-only coverage or $8,300 for family coverage. HSAs are triple tax advantaged, meaning you get a tax deduction, earnings grow tax deferred, and withdrawals for medical expenses are tax-free.
One popular strategy is to make regular contributions to an HSA, invest it, and spend out of pocket in order to use the HSA in retirement. It’s a way to build up a larger account that can be used tax-free for medical expenses later.
Lastly, if you contributed to an FSA, don’t forget to spend the funds before the end of the year. Generally, FSAs are “use it or lose it.” Unless your plan allows you to use the funds for up to two and a half months after the year ends (up to $640 in 2024), you will lose them at the end of this year.
Tax Planning Checklist Step 6: Review Tax Withholdings and Estimated Tax Payments
After you know your income for the year, such as wages, RMDs, Roth conversions, and long-term capital gain amounts, you can review your tax withholdings.
To avoid underpayment penalties, you need to pay 90% of your current year tax liabilities or 100% of your prior year tax liabilities if your adjusted gross income is $150,000 or less (110% of your prior year tax liabilities if your adjusted gross income is $150,000 or more).
If you have not withheld enough in taxes and have income that can be withheld, consider having more withheld instead of making an estimated tax payment because tax withholdings are treated as being withheld throughout the year. This means that if you are underpaid, you can bridge the shortfall late in the year and avoid underpayment penalties.
The same cannot be said for estimated tax payments. If you wait until the last estimated tax payment deadline and make a large estimated tax payment, you may still have an underpayment penalty if more should have been withheld throughout the year.
This is why it’s important to proactively plan for taxes starting when you file your tax return and throughout the year.
Tax Planning Checklist Step 7: Decide Whether to Gift to Family
Lastly, this is an excellent time of year to consider gifting money to family.
In 2024, every person can give $18,000 to as many individuals as they want and not need to file a gift tax return. In 2025, this amount may increase.
What this means is if you want to give $18,000 to each child or grandchild, you can do it without any gift tax consequences.
If you give more than $18,000 to any single person, then you would need to file a gift tax return. No gift tax is due, but it does reduce your federal lifetime exemption amount, currently at $13.61 million per person.
If you are looking to superfund a 529 plan, give family extra spending cash, or gift money to a child who is working in order for them to fund a Roth IRA, now is a great time of year to do it.
Better yet, make a calendar reminder to make another gift early in 2025!
Final Thoughts – My Question for You
With the Tax Cuts and Jobs Act due to sunset at the end of 2025, there are many tax planning opportunities this year.
Instead of waiting until December, consider taking 15 minutes to go through this checklist to see if you are missing opportunities to reduce the amount of taxes you pay over your lifetime.
Not taking action could mean paying more taxes than you are legally obligated. Do you want to pay more in taxes?
As I once heard, “Pay all the taxes you owe, but don’t leave the IRS a tip.”
Which steps will you take to reduce the likelihood that you are leaving the IRS a tip?
