By: Gary H. Hirsh, CFP®, CPA
As you prepare for the 2024 tax filing season and look ahead to 2025 tax planning, reviewing specific tax considerations that could impact your return is essential. Below are key areas to focus on to maximize deductions, minimize liabilities, and optimize financial strategies.
Wage Income Considerations
Certain states do not align with federal tax rules regarding reducing taxable wage income. For example:
New Jersey does not allow pre-tax medical withholdings to reduce taxable wage income.
New York requires public employees to add back 414(h) retirement contributions to their federal adjusted gross income.
If you work in multiple states, wage allocation methods vary. Some states list "state wages" equal to federal wages, while others require allocation based on the days worked in each state. Always review your W-2 reporting and state requirements carefully.
Additionally, if you work remotely in a state different from your employer, you may face state tax residency issues. Many states are tightening residency rules, so confirm your tax obligations to avoid unexpected tax bills.
Interest Income and Bond Considerations
Investors often overlook adjustments to bond interest income, leading to overpaying taxes. Keep these points in mind:
If you purchased a bond at a premium or paid accrued interest, you may be eligible to deduct these costs when reporting interest income.
Mutual funds or ETFs that hold U.S. Treasury securities may generate interest taxable at the federal level but exempt from state taxes. This percentage can be found on your fund sponsor's tax center website.
Municipal bond interest is only exempt if your home state issues the bonds. For example, New York only allows municipal income exclusions if at least 50% of the fund's assets are invested in NY tax-exempt securities.
Capital Gains & Cost Basis Reporting
Common mistakes in capital gains reporting include:
Forgetting to include reinvested dividends in the cost basis of sold securities. This issue primarily affects securities acquired before 2010, when brokerage firms were not required to track this.
Restricted stock and stock options – If you received stock through incentive stock options (ISOs) or restricted stock units (RSUs), be sure that your cost basis reflects any amounts already taxed through your W-2.
Inherited stock or property – Ensure the cost basis is stepped up to the fair market value as of the original owner's date of death, which can reduce taxable gains when sold.
IRA Distributions, Roth Conversions & Qualified Charitable Distributions (QCDs)
If you made non-deductible contributions to a traditional IRA, ensure you track your cost basis to avoid double taxation when withdrawing funds.
For those age 70½ or older, Qualified Charitable Distributions (QCDs) from an IRA reduce taxable income but are not automatically deducted on Form 1099-R. You must manually adjust this on your tax return.
Roth Conversions & Tax Bracket Planning:
If you expect your tax bracket to be higher in retirement, converting pre-tax funds to a Roth IRA in 2025 could save on long-term taxes.
With the TCJA tax cuts expiring after 2025, tax rates may rise in 2026. Converting before then can lock in lower rates.
Consider partial conversions to manage tax impact and leverage deductions like charitable giving or medical expenses.
Business Deductions & Pass-Through Entity Taxes
While employee business expenses are no longer deductible for W-2 employees, self-employed individuals, and business owners should ensure they are claiming all eligible deductions, such as:
Marketing & advertising expenses
Home office deduction (if used exclusively for business)
Mileage deductions for business-related travel
Self-employed health insurance premiums
Technology & software expenses
Pass-Through Entity Tax (PTET): Many states allow business owners to deduct state income taxes on business income through an entity-level tax. As of 2025, 34 states offer this option. If you have significant business income, electing S-corp status or forming a partnership with your spouse could provide tax benefits.
Catch-Up Contributions for High Earners (New for 2025!)
Starting in 2026, high-income earners ($145,000+ in wages) must make 401(k) catch-up contributions to a Roth 401(k) instead of a traditional pre-tax account.
This change eliminates the immediate tax deduction for high earners but allows for tax-free growth and withdrawals in retirement.
529 Plans & Education Tax Benefits
529 Plan Expansion: Clients can now roll over unused 529 funds into a Roth IRA for the beneficiary (subject to limits).
American Opportunity Credit vs. Lifetime Learning Credit: If you have college-age children, maximizing education credits offers better benefits than tuition deductions.
Charitable Giving Strategies
Bunching deductions – Since the standard deduction remains high, grouping multiple years' donations into one tax year can help exceed the standard deduction and allow for itemization.
Donor-Advised Funds (DAFs) – If you have a high-income year, contributing to a DAF allows for an immediate deduction while distributing gifts to charities over time.
Qualified Charitable Distributions (QCDs) – Clients over 70½ can donate directly from an IRA to reduce taxable income without increasing their adjusted gross income (AGI).
Estate & Gift Tax Exemptions: Act Before 2026
The estate tax exemption is historically high ($13.61 million in 2024, likely increasing in 2025), but it is set to drop significantly after 2025 if Congress does not extend current laws.
If you have significant assets, consider:
Use your lifetime gift tax exemption before limits decrease.
Annual gifting ($19,000 per recipient in 2025) to transfer wealth tax-efficiently.
Itemized Deductions: What Still Counts?
While the 2017 Tax Cuts and Jobs Act (TCJA) limited deductions at the federal level, some states still allow deductions beyond the federal limits, including:
State & local taxes (SALT): Some states allow deductions beyond the $10,000 federal cap on real estate and income taxes.
Mortgage interest deductions: While the federal limit applies to loans under $750,000, some states allow deductions for higher mortgage balances.
Moving expenses, investment advisory fees, and tax preparation fees are still deductible in certain states.
Final Thoughts: Stay Proactive in 2025
Tax laws continue to evolve, and state-specific rules can significantly impact your tax liability. Proactively reviewing your tax situation with your financial advisor and CPA can help you identify opportunities for tax savings and avoid costly mistakes.
Feel free to reach out if you have questions about optimizing your investment tax strategies, retirement distributions, or business deductions. Planning ahead can make a meaningful difference in your tax bill next year.