Ed Slott: Year-End Tax Planning Dos and Don'ts

THINKADVISOR: What should advisors avoid before year-end?

ED SLOTT: Complacency.

Yes, the lower tax rates were extended permanently by OBBBA — but this is no time to let your guard down — a future Congress could still increase tax rates.

Take advantage now before year end especially with Roth conversions, and maximizing the lower tax rates for 2025.

Also, avoid focusing on reducing taxes for this year at the expense of lifetime tax savings. Plan for life and beyond, not just for this year.

THINKADVISOR: What should advisors be doing — or telling their clients to do — before year-end?

SLOTT: Many clients are too heavily weighted in IRAs and need to reduce those balances to address tax risk diversification. Too many eggs in taxable baskets.

Reduce IRA balances while low rates are here: Use Roth conversions. Use [qualified charitable distributions] for those who qualify and are charitably inclined.

If you give to charity, QCDs are the most tax effective way to do that. That should be done before year-end.

The only downside with QCDs is that they are not available to enough people. They are only available to IRA owners and IRA beneficiaries who are age 70 ½ or older. Take advantage of QCDs even before RMDs begin at age 73, since QCDs can be done at age 70 ½. This will reduce IRA balances at zero tax cost and lower future RMDs.

For those subject to RMDs, increase them to use up the low 22 and 24% tax brackets. This includes beneficiaries who inherited after 2020 and are subject to the 10-year rule under the Secure Act.

Most of these beneficiaries should not wait until year 10 when there will be a 100% RMD and a huge tax bill. Better to smooth out that income over the 10 years and take advantage of the low tax rates while they are here.

THINKADVISOR: And for clients not subject to RMDs?

SLOTT: Talk with clients who are not yet subject to RMDs — those maybe in their 60s, and address doing Roth conversions before RMDs are required, to take advantage of low rates and fill up the low tax brackets. This can substantially reduce heavy IRA balances before RMDs kick in at unknown future tax rates (which could be higher). This strategy should be evaluated for every client with a large IRA. Once RMDs begin, planning options are constrained, and IRA balances may be much higher.

Bunch more charitable deductions into this year — to avoid reductions in 2026.

In 2026, those in the top 37% tax bracket will only get a charitable contribution deduction limited to 35%. Also, all taxpayers who itemize will be subject to an overall floor of 0.5% of AGI on charitable itemized deductions. It sounds small but can result in losing a deduction for charitable gifts.

For example, if 2026 AGI is $400,000, the floor would be $2,000 ($400,000 x .5% = $2,000), so only donations above that amount will be deductible. This would be a reason to bunch more charitable deductions into this year (2025) while they still can be fully deductible.

Alternatively, next year (2026) all taxpayers will receive a $1,000 deduction for charity ($2,000 for married-joint) for non-itemizers. So, advisors will have to see where clients will gain the largest tax benefit for making charitable gifts. For those IRA clients who qualify for QCDs, they provide the largest tax benefit, because they can reduce RMDs and AGI.

THINKADVISOR: How about preparing for SALT changes?

SLOTT: More clients will itemize this year — due to increased SALT (state and local tax) deductions — make sure they are gathering receipts! They haven’t had to do that in the past years since most people were taking the standard deductions.

The new increased SALT limits — now up to $40,000 from $10,000 over the past years — will allow many more people to itemize their deductions, which can lower income and may make room for year-end Roth conversions.

Roth conversion planning is tricky because a 2025 Roth conversion must be done in 2025 even though the exact 2025 income will not be precisely known until the tax return is filed next year. This means that advisors will have to make estimates, projecting 2025 income to see where the optimal conversions will be, while also taking into account several new OBBBA tax deductions which could be lost at different AGI levels. Deductions for seniors, tips, overtime, and the SALT deductions all phase out at various income levels. However, the SALT deduction, probably the most valuable will be available to many more clients since that deduction does not phase out until AGI exceeds $500,000.

THINKADVISOR: What should advisors be looking out for — or preparing for — next year?

SLOTT: High-net-worth clients should look to use the increased estate and gift tax exemptions — $15 million per person beginning in 2026 — clients with larger estates can use those exemptions during life through gifting — and locking in those generous exemption amounts — a future Congress could reduce those amounts.

Gifts to grandchildren are particularly valuable to lock in the generation-skipping transfer tax exemption (also $15 million per person, but not portable to a surviving spouse like the estate and gift exemptions are). Lifetime gifts can also lower estate values for clients who may be exposed to state estate taxes, where exemptions are often much lower than the federal amount.