You may still be breathing a sigh of relief about completing your taxes for 2024, relishing the thought that you don't have to think about filing for tax year 2025 for many months to come. But with summer heating up, now can be a great time to start lining up your strategy to help reduce your 2025 tax bill. Starting early can pay off when it's time to file next April.
Here are 6 tax-planning strategies to consider:
1. Examine your W-4 withholdings
Most people fill out their W-4 form and forget about it soon after they've started a new job. But now may actually be a great time to reexamine your withholdings.
Your employer uses your W-4 to calculate how much federal tax should be taken out of your paycheck based on your income (and, potentially, whether you intend to take the standard deduction or itemize). But your income and tax situation may have changed, and you could be withholding either too little, which could increase your tax bill, or too much, which could deprive you of cash throughout the year.
There are a few specific reasons why you might need to update your W-4:
- You've added a dependent since you last updated your W-4. There's a section that allows you to adjust withholdings for dependents, which can help you if you're planning to claim the Child Tax Credit (CTC) for the year. The CTC is a partially refundable tax credit worth up to $2,000 per qualifying child under the age of 17, and it works as a dollar-for-dollar reduction of your tax bill. Alternatively, dependents who don't qualify for the CTC may qualify for the Credit for Other Dependents. This credit can be up to $500 and is nonrefundable, meaning it may reduce your tax bill to $0, but not beyond.
-
Find out more in Viewpoints: What is the Child Tax Credit?
- You've taken on additional work. If you're working more than one job, or have income from freelance or contract work, you may have more than one W-4 or receive a Form 1099-NEC. If the former, you may need to do some strategizing, as filling out a second W-4 the same way you filled out your first could result in the wrong amount of tax being withheld. If the latter, taxes may not be automatically withheld, and you may be responsible for making quarterly estimated tax payments. One solution may be to increase withholding for one W-4 job to cover the tax liability generated from the income earned at the other job.
- You're planning to itemize this year. If you expect to itemize rather than take the standard deduction this year, then you can update your W-4 to reflect the deductions you plan to take. This could also reduce your total tax withholding for the remainder of the year.
Consider also how your taxes went for the 2024 year. Did you owe a large sum or receive a very large refund in the recent tax season? If so, consider checking with your tax professional on whether you ought to make any adjustments to your W-4 for this year.
If you do, your employer's human resources department should generally be able to advise you on how to submit a new form, and when it will take effect.
2. Look for tax losses to harvest
Take a careful look at the winners and losers in your taxable accounts and consider whether it would make sense to sell any of the positions you hold at a loss. This is called tax-loss harvesting, a strategy in which you can use realized losses to offset realized gains (plus up to $3,000 of ordinary income per year, depending on filing status).
A challenge in tax-loss harvesting is to make sure that you maintain your targeted investing mix even as you're selling positions. One way to potentially do so is by selling one investment at a loss and replacing it with a similar, but not substantially identical, security. (When considering tax-loss harvesting, be sure to understand the wash-sale rule. This prevents investors from claiming the tax benefit of selling at a loss and buying the same, or "substantially identical," investment back within a 61-day window.)
If you're already a Fidelity customer and have a taxable account with net realized capital gains and unrealized losses, try our new Tax-Loss Harvesting Tool for step-by-step guidance to see if you can save on taxes while staying invested.
3. Reconsider itemizing
Maybe you bought a house or had large out-of-pocket medical expenses this year. If that's the case, you may want to itemize if you think your deductions will add up to more than the standard deduction, which is $15,000 for single filers and $30,000 for married couples for 2024.
There are 5 main categories of itemizable deductions. These include medical expenses, home mortgage interest, state and local taxes, charitable contributions, and theft and casualty losses due to a federally declared disaster. Each of these is subject to various limitations (for example, you can only itemize the amount of unreimbursed medical expenses that is greater than 7.5% of your adjusted gross income).
If you do expect to itemize, it could make sense to start getting organized now, such as by keeping good records of the expenses you plan to itemize.
Planning ahead on itemizing could also help you decide on other financial moves to make over the rest of the year. For example, if you know you're going to itemize this year but you usually take the standard deduction, then it could potentially make sense to "bunch" several years' worth of charitable donations into the current tax year. (Learn more about tax-smart charitable giving strategies.)
4. Boost your pre-tax contributions
Contributions to traditional (but not Roth) employer retirement plans, traditional IRAs, and health savings accounts (HSAs) may all reduce your current federal taxable income dollar for dollar when they are made with pre-tax money. If there's room in your budget to increase your savings and it makes sense within your broader financial picture, consider increasing your contributions to:
- Employer-sponsored plans: 401(k) and 403(b) participants can generally contribute $23,500 for the 2025 tax year (with December 31 as the final date to make contributions). People 50 and older can make catch-up contributions of up to $7,500.1 Individuals ages 60 through 63 years old will be able to make catch-up contributions to eligible retirement plans of $11,250, in place of their normal $7,500 catch-up.
- IRAs: You have until the federal tax filing deadline in April 2026 to contribute to a traditional IRA for 2025. The contribution limit is $7,000, or $8,000 if you are 50 or older. While only contributions to a traditional (not Roth) IRA may provide current-year tax benefits, there can also be powerful future tax advantages to making Roth contributions. (Read more about deciding between a traditional or Roth IRA.)
- HSAs: If you're enrolled in a high-deductible health plan, then you may be eligible to save in a health savings account (HSA), which can let you save now for current and future qualified medical expenses. For 2024, individuals can generally save up to $4,300 per year, while for family coverage the contribution limit is $8,550, with $1,000 more in catch-up contributions for those age 55 and over. If both spouses are covered by an HSA-eligible health plan, have their own HSA, and are age 55 or older, they are both eligible to make a catch-up contribution of $1,000. The maximum contribution limit to be allocated between them is $10,550; however, spouses must make their contributions to their own accounts.
Unlike a flexible spending account (FSA), the money in an HSA can stay in your account year after year—potentially growing—if you don't spend it. After age 65, you can even use HSA money for nonmedical expenses without incurring penalties, but these withdrawals will be taxable. (Read more about healthy habits for your HSA.)
Not only can these contributions potentially result in tax savings this tax year, they're also an investment in your future financial security.
5. Plan for RMDs
The SECURE 2.0 Act increased the age at which owners of certain retirement accounts must start taking required minimum distributions (RMDs) from 72 to 73. (Starting in 2033, if you were born in 1960 or later, the age at which RMDs must start pushes back even further to age 75.)
Withdrawals from traditional 401(k)s and IRAs are taxable, but there are ways to reduce the bite with planning. And it's important to avoid penalties for failing to take RMDs. The SECURE 2.0 Act also decreased the penalty for failing to take an RMD to 25% of the RMD amount not taken (from its previous level of 50%). The penalty will be reduced to 10% if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
6. Consider a Roth conversion
With market volatility still in the picture and possible tax increases on the horizon, now may be the time to think about a Roth conversion, in which you transfer money from a traditional IRA into a Roth IRA.
A conversion can let you tap into the advantages of a Roth account with that money, including no RMDs and tax-free qualified withdrawals2 in retirement. While you'll have to pay taxes on the amount you convert, paying for them now could be beneficial especially if you’re currently in a lower tax bracket than you expect to be in the future. Additionally, lower stock prices could also reduce the tax hit on converted money.
If you're a high earner, you might also want to consider a backdoor Roth IRA. It's a way of moving money into a Roth IRA, accomplished by making nondeductible contributions—or contributions on which you do not take a tax deduction—to a traditional IRA and then converting those funds into a Roth IRA. (It's different from a typical Roth conversion, which is the transfer of tax-deductible contributions in a traditional IRA to a Roth IRA.)
Choose the moves that are right for you
Everyone's tax situation is different, and it makes sense to consult with a tax professional to come up with a financial plan that works for you. With a little planning this summer, you can rest easy knowing that come tax time, you'll be prepared.