2025 Year-End Tax Planning for Investors and Estate & Gift Planning

Year-end tax planning offers meaningful opportunities for investors and families to strengthen their financial position and prepare for the year ahead. With new OBBBA updates affecting capital gains, retirement distributions, and estate and gift strategies, it is more important than ever to review your portfolio and long-term plans. Taking time to evaluate these changes can help ensure your financial approach remains aligned with your goals.

Capital Gains and Losses

Investors can manage sales of assets like securities at year-end to maximize tax benefits. First, capital gains and losses offset each other. If you show an excess loss for the year, you can offset up to $3,000 of ordinary income before any remainder is carried over to next year. Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15%, or 20% for high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching 37%. The OBBBA preserves these tax rates for 2026 and beyond.

YEAR-END MOVE: Review your portfolio. Depending on your situation, you may “harvest” capital losses to offset gains, especially high-taxed short-term gains, or realize capital gains that will be partially or wholly absorbed by losses.

Be aware of even more favorable tax treatment for certain long-term capital gains. Notably, a 0% rate applies to taxpayers below certain income levels, such as young children. Furthermore, some taxpayers who ultimately pay ordinary income tax at higher rates due to their investments may qualify for the 0% tax rate on a portion of their long-term capital gains.

However, watch out for the “wash sale rule.” If you sell securities at a loss and reacquire substantially identical securities within 30 days of the sale, the tax loss is disallowed. One way to avoid this adverse result is to wait at least 31 days to reacquire substantially identical securities.

Note: A disallowed loss increases your basis for the securities you acquire and could reduce taxable gain on a future sale.

Tip: The preferential tax rates for long-term capital gains also apply to qualified dividends. These are most dividends paid by U.S. companies or qualified foreign companies.

Net Investment Income Tax

When you review your portfolio (see above), do not forget to account for the 3.8% “net investment income (NII) tax”. The NII tax applies to the lesser of net investment income or the amount by which MAGI for the year exceeds $200,000 for single filers or $250,000 for joint filers. These thresholds are not indexed for inflation. The definition of NII includes interest, dividends, capital gains and income from passive activities, but not Social Security benefits, tax-exempt interest and distributions from qualified retirement plans and IRAs.

YEAR-END MOVE: Have an estimate made of your potential liability for 2025. Depending on the results, you may be able to reduce the tax on NII or avoid it altogether.

For example, you may invest in municipal bonds (“munis”). The interest income from munis does not count as NII, nor is it included in the MAGI calculation. Similarly, if a passive activity becomes an active business, the resulting income may be exempt from the NII tax.

Tip: When you add the NII tax to your regular tax, your combined federal and state effective tax rate could exceed 40% to 50% for residents in some states. Factor this into your investment decisions.

Required Minimum Distributions

Generally, you must begin taking “required minimum distributions” (RMDs) from qualified retirement plans, like 401(k) plans, and IRAs after a specified age. Under SECURE 2.0, the age threshold has been raised to 73 (scheduled to increase to 75 in 2033). The amount of the RMD is based on IRS life expectancy tables and your account balance at the end of last year.

YEAR-END MOVE: Assess your obligations. If you can postpone RMDs longer, you can continue to benefit from tax-deferred growth. Otherwise, make arrangements to receive RMDs before January 1, 2026, to avoid any penalties.

Conversely, if you are still working and do not own 5% or more of a business with a qualified plan, you can postpone RMDs from that plan until your retirement. This “still working exception” does not apply to RMDs from IRAs or qualified plans of other employers.

Previously, the penalty for failing to take timely RMDs was equal to 50% of the shortfall. SECURE 2.0 cuts the penalty in half to 25% (10% if corrected in a timely fashion).

If subject to RMDs, consider making a qualified charitable distribution (QCD), as discussed further below.

Tip: Beneficiaries of qualified plans and IRAs must also comply with RMD rules. If you are a non-spouse beneficiary, you are generally required to empty out the account over ten years. The IRS waived penalties for missed annual RMDs for 2021-2024 for beneficiaries subject to this 10-year rule. However, starting in 2025, these annual RMDs are mandatory and missed distributions will be subject to a 25% penalty

401(k) Plan Savings

Contributions to a 401(k) plan are made by employees on a pre-tax basis and can earn tax-deferred income until withdrawals are made. Plus, your company may provide “matching contributions” based on a percentage of salary.

YEAR-END MOVE: Step up contributions to feather your 401(k) nest egg. In fact, if you have cleared the Social Security wage base of $176,100 in 2025, you can allocate some or all of the payroll tax savings to extra 401(k) contributions without reducing take-home pay.

For 2025, the regular contribution limit is $23,500, but if you are 50 or older you can add a “catch-up contribution” of $7,500 for a total of $31,000. Even better: Under SECURE 2.0, those age 60 through 63 can make a “super catch-up contribution” of $11,250 for a total of $34,750.

Beginning in 2026, if individuals age 50 and over earned more than $145,000 in the prior year, any of their 401(k) catch-up contributions must be made to a Roth-type account.

Tip: The Roth version of the 401(k) imposes tax on amounts contributed in 2025, but future payments are generally exempt from tax.

Also consider contributing to traditional IRAs ($7,000 annual limit, $8,000 if age 50 or older), or HSAs ($4,300 for self-only coverage and $8,550 for family coverage; those 55 or older can contribute an additional $1,000) if eligible to do so.

Estate and Gift Tax

Due to a series of laws ending with the TCJA, the federal estate and gift tax exemption has gradually increased from $1 million to $10 million, indexed for inflation. For decedents dying in 2025, it is $13.99 million. However, the exclusion was scheduled to revert to $5 million, plus indexing, in 2026. Now the OBBBA has permanently increased the exclusion to $15 million in 2026 with indexing. The exclusion amounts dating back to the TCJA are shown below.

YEAR-END MOVE: Adjust your estate plan as needed. For instance, your plan may involve various techniques, including trusts, that maximize the benefits of the estate tax exemption.

Furthermore, you can reduce the size of your taxable estate through lifetime gifts. Thanks to the annual gift tax exclusion, you can give each recipient up to $19,000 in 2025 without any gift tax liability. Thus, a couple can effectively give tax-exempt gifts up to $38,000 per recipient.

Tip: You may “double up” by giving gifts in both December and January that qualify for the annual gift tax exclusion for 2025 and 2026, respectively. The IRS recently announced that the limit for 2026 remains at $19,000 per recipient.

Miscellaneous

• Minimize “kiddie tax” problems by having your child invest in tax-deferred or tax-exempt securities. For 2025, unearned income above $2,700 that is received by a dependent child under age 18 (or under age 24 if a full-time student) is taxed at the top tax rate of the parents.
• If you rent out your vacation home, keep your personal use within the tax law limits. No loss deduction is allowed if your personal use exceeds the greater of 14 days or 10% of the rental period.
• From a tax perspective, it is often beneficial to sell mutual fund shares before the fund declares dividends (the ex-dividend date) and buy shares after the date dividends are declared.
• Sell real estate on an installment basis. For payments over two years or more, you can defer tax on a portion of the sales price. Also, this may effectively reduce your overall tax liability. If selling real estate, also consider the tax deferral opportunity of a Section 1031 exchange if acquiring like-kind property. These rules are complex, so consult your tax advisor before entering into any real estate contracts if considering a like-kind exchange.
• Consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $108,000 of IRA funds directly to charity in 2025, free of tax (but not deductible). SECURE 2.0 authorizes a one-time transfer of up to $54,000 to a charitable remainder trust (CRT) or charitable gift annuity (CGA) as part of a QCD.
• Weigh the benefits of a Roth IRA conversion, especially if this will be a low-tax year. Although the conversion is subject to current tax, you generally can receive tax-free distributions in retirement, unlike taxable distributions from a traditional IRA.

We Are Here to Help

These provisions highlight the value of proactive, coordinated planning across investments, retirement accounts, and estate strategies. ML&R is here to provide clarity and guidance as you assess your next steps. For additional insights, explore our related year-end articles, including 2025 Year-End Tax Planning for Business Owners and 2025 Year-End Tax Planning for Individuals. Contact our team to discuss how these changes may impact you and to build a tax-efficient plan for the year ahead.