By Laura Saunders
The rush is on to make year-end tax moves for 2025.
Most taxpayers should focus first on strategies for their state and local tax deductions (SALT) and charitable donations, as detailed in my last Tax Report. But those aren't the only moves to consider before the year's end, given the wide array of changes in President Trump's megabill enacted in July, plus issues that recur annually.
Here's more to know to shrink what you'll owe April 15.
New tax deductions and Roth conversion pitfalls. This summer's megabill expanded the SALT deduction and added targeted tax breaks for seniors, overtime pay, tip income and car-loan interest for a few years. Filers can get the targeted breaks even if they take the "standard" deduction rather than itemizing on Schedule A, and the standard deduction got a bump-up as well.
As a result, some taxpayers are considering doing Roth IRA conversions because the higher deductions can shelter the taxable income these transfers generate.
Look before you leap, however. Congress wrote the megabill so that the SALT expansion and the new deductions do reduce taxable income -- but they don't reduce adjusted gross income $(AGI)$. AGI, which is on Line 11 of the 1040 form, is typically much larger than taxable income and serves as a key threshold for a host of phase-ins, phaseouts and other provisions. These include the 3.8% surtax on net investment income, taxes on Social Security payments and Medicare income-based premiums known as Irmaa.
The upshot is that while this year's larger deductions could lower the taxable income from a Roth conversion, the conversion amount will still raise AGI. That, in turn, could leave savers who do conversions at risk for other tax increases.
Here's a simplified example. Say that John and Jane, who are married retirees on Medicare who itemized deductions last year, will deduct $30,000 more of SALT for 2025. Yes, they could use this $30,000 deduction to offset taxable income of $30,000 from a Roth IRA conversion.
However, the couple would still have $30,000 more of AGI for this year. That could mean higher Medicare Irmaa premiums in the future, if their AGI crosses a threshold. It could also raise the 3.8% surtax on net investment income.
Of course, John and Jane may opt to go ahead with the Roth conversion -- but they should be aware of tax consequences.
Required withdrawals from inherited IRAs. Since 2020, many nonspouse heirs of traditional and Roth IRAs have been required to drain the accounts within 10 years of the owner's death.
In addition, these heirs have to take annual required minimum distributions (RMDs) from the accounts if the original owner was required to. Because of taxpayer confusion, however, the IRS waived penalties on these payouts if the heirs didn't take them for 2021 to 2024.
This grace period is now over, so IRA heirs who are required to take RMDs must take them for 2025 by year-end.
Larger 529 withdrawals for 2025. Under the megabill, owners of 529 education savings plans can make tax-free withdrawals of funds for a broader array of K-12 expenses than under prior law for expenses incurred after July 4, 2025. Eligible expenses include books, standardized tests such as the SAT and ACT, plus tutoring for such tests, among other things. Also allowed are the cost of therapies for disabled students and college classes for high-school students.
Total tax-free withdrawals for these expenses can't exceed $10,000 for 2025, according to 529-plan specialist Mark Kantrowitz, although next year that will double to $20,000. He also advises checking your state plan to make sure it conforms to the federal changes. While many do, some don't.
'Qualified business income' deduction expansion. This popular provision, also known as the 199A deduction, allows owners of pass-through entities such as partnerships and sole proprietorships that report results on their owners' returns to deduct up to 20% of business income. It was enacted as part of the 2017 tax overhaul and made permanent in this summer's megabill.
Overlooked by many is that the megabill also expanded a key phaseout for this break. The change, which takes effect for 2026, means that the 199A deduction for single filers will apply for taxable income up to $276,750 next year, versus $247,300 for 2025. For joint filers, the 2026 limit will be $553,500 versus $494,600 for 2025.
Tim Steffen, director of advanced planning at Baird, is advising clients who will exceed the income phaseout this year to defer business income into 202 6 or else accelerate expenses into this year if possible. "Either way, shifting income from 2025 to 2026 could reduce the total impact of the phaseout, maximizing the deduction over the two years," he said.
Expiring clean-energy provisions. The megabill sped up expiration of energy-efficient home-improvement tax breaks that provide dollar-for-dollar tax credits of up to $3,200 per filer. This credit expires at the end of 2025, and improvements must be fully installed and functional by then for taxpayers to qualify.
Eligible expenses are for energy-efficient doors and windows, solar panels and water heaters, among other things -- so make sure to finish the work by year-end.
Post-year-end options. Nearly all year-end tax moves by individuals for 2025 must be complete by Dec. 31, but there are exceptions. Savers can make 2025 contributions to traditional and Roth IRAs and to health savings accounts until April 15, 2026. After that, there is no further extension, even if the saver gets permission to file in October.
With Solo 401(k) plans and SEP IRAs, savers can often make contributions after the April filing date -- if they have an extension to file. Note: Deadlines might differ for victims of federally declared disasters.
Write to Laura Saunders at Laura.Saunders@wsj.com
(END) Dow Jones Newswires
December 12, 2025 05:30 ET (10:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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