Year-End Tax Considerations: Implementing Tax Strategies & Assessing Common Pitfalls Before December 31st

As the end of the year approaches, many individuals and families are busy with holiday preparations, managing seasonal travel, and looking toward the new year. However, December is also a critical window of opportunity to take proactive steps that can significantly reduce your tax liability. Engaging a CPA now—while there is still time to adjust transactions, correct classification errors, and gain a holistic view of your tax exposure—is one of the smartest financial moves you can make. Here are the specific tax strategies that taxpayers most often overlook or mismanage—and how timely professional intervention can turn potential pitfalls into substantial savings:

Maximize Tax-Advantaged Retirement Contributions

One of the most effective ways to reduce your taxable income is by maximizing contributions to retirement accounts such as IRAs and 401(k)s. For 2025, the contribution limits are $7,000 for IRAs (with an additional $1,000 catch-up for those 50 and older) and $23,500 for 401(k)s (plus $7,500 catch-up for those 50 and older). For individuals who turn age 60, 61, 62, or 63 during 2025, the 401(k) catch-up contribution limit increases to $11,250. Contributing the maximum allowed before year-end can lower your current year’s taxable income and help you build long-term wealth.

For S-Corp owners, strict adherence to the definition of wages versus distributions is non-negotiable. You must ensure that your W-2 wages and shareholder distributions are clearly defined, as this directly dictates your overall tax efficiency. To count retirement contributions as a deductible business expense, you must utilize specific company-sponsored plans—such as a Solo 401(k)—rather than personal accounts. If these contributions are not structured correctly, the withdrawal will be treated as a shareholder distribution. Since distributions are not tax-deductible expenses, you will lose the tax benefit and effectively owe income tax on the transferred funds inadvertently subjecting your retirement savings to immediate taxation. Fortunately, there is still time to correct this. Provided you establish a qualified plan and formally execute your elective deferrals via a recorded payroll run before the December 31st deadline, you will satisfy the compliance requirements necessary to capture the deduction for the current tax year.

Harvest Investment Losses and Gains

Year-end is the perfect time to review your investment portfolio for opportunities to harvest tax losses or gains. Selling investments that have declined in value can offset capital gains realized during the year, and up to $3,000 of net capital losses can offset ordinary income. Should your losses exceed this limit, the excess carries forward indefinitely, allowing you to deduct up to $3,000 against ordinary income in each subsequent year until the full loss is utilized. For those with a filing status of married filing separately, the net capital loss deduction and any carryforward is limited to $1,500 per tax year. Conversely, if you’re in a lower tax bracket, it may make sense to realize capital gains at favorable rates.

Assess Withholdings and Estimated Tax Payments

Avoiding underpayment penalties is a key part of year-end tax planning. If you’ve had changes in income, withholding, or deductions during the year, it’s important to review your tax payments to date. This is particularly critical for households navigating complex income events like vesting equity awards (RSUs), exercising stock options, large bonuses, or significant capital gains, where standard withholding often fails to cover the actual tax liability. Furthermore, increasing your W-2 withholding offers a unique strategic advantage: unlike quarterly estimated payments, the IRS treats the total annual withholding reported on your W-2 as if it were paid evenly throughout the year, allowing you to retroactively "cure" underpayment deficits from earlier quarters in the tax year and avoid penalties.

Optimize Charitable Giving Opportunities

For those who itemize, making charitable contributions by December 31st can significantly reduce your tax liability—but the way you give matters. Donating appreciated securities, such as stocks or mutual funds held for more than one year, is often far more tax-advantageous than giving cash. When you donate appreciated securities directly to a qualified charity, you are generally eligible to deduct the fair market value of the securities at the time of the donation, subject to applicable percentage limitations based on your adjusted gross income. In addition, by donating the securities rather than selling them first, you do not realize the capital gain that would otherwise be recognized upon sale. As a result, you may both receive a charitable deduction and avoid incurring capital gains tax on the appreciation.

It is also important to note that the landscape for charitable deductions will shift next year due to the passage of the One Big Beautiful Bill Act (OBBBA). Starting in 2026, new limitations will take effect that generally lower the deduction allowed for charitable gifts compared to what is currently permitted. Because these restrictions do not apply to the current tax year, 2025 offers a final window to utilize the existing, more favorable rules. Consequently, 'front-loading' contributions into this calendar year allows you to capture the full benefit of your donations before the new caps reduce the eligible amount of these tax deductions.

Leverage the Annual Gift Tax Exclusion

The annual gift tax exclusion allows you to give up to $19,000 per recipient in 2025 to as many individuals as you wish, free of gift tax and without using your lifetime exemption. For married couples, this benefit effectively doubles, allowing you to jointly transfer up to $38,000 per beneficiary annually without triggering a gift tax return requirement. Crucially, this exclusion is a "use-it-or-lose-it" opportunity; unused capacity does not carry over to future years, meaning a missed year represents a permanent loss of tax-free wealth transfer potential. Making gifts before year-end can be a powerful way to transfer wealth to family members or loved ones while reducing your taxable estate.

Proactive Planning for Peace of Mind

Each of these strategies requires careful planning and timely execution. Waiting until after December 31st often means the window for these deductions closes permanently, leaving you with missed opportunities and a higher tax liability. By engaging our firm before the year closes, you hand off the burden of tax planning and gain the peace of mind to truly unplug during the holiday season. We transition you from reactive tax compliance to active tax management, ensuring your financial strategies work together to optimize your effective tax rate rather than operating in silos. Don't wait for surprises in 2026; take control of your tax situation now, while there is still time to act.