As the year winds down, it’s time to look beyond holiday shopping and start thinking about your taxes. Smart year-end tax planning can save you hundreds—or even thousands—of dollars when you file next spring. Whether you’re self-employed, a homeowner, or a salaried employee, taking a few strategic steps before December 31 can make a big difference in your final tax bill.
Below are the most effective tax planning moves to consider before the year ends.
1. Review Your Income and Withholding
Start by reviewing your total income for the year and comparing it to the previous year. If you received a raise, bonus, or additional freelance income, your tax bracket may have shifted. Check your most recent pay stub and see whether enough taxes are being withheld from your paycheck.
If you’ve underpaid, you might face a large bill—or even a penalty—when you file. You can still make an adjustment by filing a new W-4 form with your employer before the year ends. Increasing your withholding slightly now can reduce the risk of a surprise tax bill later.
For freelancers or self-employed individuals, make sure you’ve made your estimated quarterly tax payments on time. The final payment is usually due in January, but you can make it earlier to offset any underpayment for 2025.
2. Max Out Retirement Contributions
One of the best ways to reduce taxable income is by contributing to tax-advantaged retirement accounts. If you have a 401(k), 403(b), or similar employer plan, the IRS allows you to contribute up to a set annual limit (for 2025, it’s expected to remain around $23,000, with an additional catch-up contribution for those aged 50 and older).
Each dollar you contribute lowers your taxable income, which can drop you into a lower tax bracket and save significant money. If you’re self-employed, don’t overlook SEP IRAs or Solo 401(k)s—these allow high contribution limits and can be a powerful year-end deduction.
Even contributions to a traditional IRA can help, depending on your income level and whether you or your spouse have access to a workplace plan. Make a note that IRA contributions can typically be made until the tax filing deadline, but it’s wise to plan early.
3. Harvest Tax Losses from Investments
If you’ve sold any investments at a gain this year, you can offset that income by selling losing positions—a strategy known as tax-loss harvesting. By realizing losses before December 31, you can reduce your taxable capital gains and even use up to $3,000 of losses to offset other income.
Be careful, though, of the “wash-sale rule,” which prevents you from claiming a loss if you repurchase a substantially identical investment within 30 days before or after the sale. Instead, consider buying a similar—but not identical—fund or stock to maintain market exposure while still realizing the tax benefit.
4. Make Charitable Donations
Charitable giving remains one of the simplest and most rewarding ways to reduce your tax burden. If you itemize deductions, donations made to qualified charities by December 31 can lower your taxable income.
You can give cash, but donating appreciated stocks or mutual funds can be even more tax-efficient. By transferring appreciated assets directly to a charity, you can avoid paying capital gains tax on the appreciation and still deduct the full fair market value.
Keep detailed records of every contribution—receipts, bank confirmations, or acknowledgment letters from the organization—since the IRS requires documentation for deductions.
5. Consider a Roth Conversion
If your income is lower this year than usual, it might be a good time to convert part of your traditional IRA into a Roth IRA. This process, known as a Roth conversion, means you’ll pay taxes now on the converted amount but allow it to grow tax-free in the future.
Roth conversions can make sense if you expect your future tax rate to be higher or if you want to minimize required minimum distributions (RMDs) later in retirement. However, it’s essential to estimate the tax bill and ensure you have cash on hand to cover it before making the move.
6. Spend Your Flexible Spending Account (FSA) Funds
If you have a healthcare FSA through your employer, check your balance before year-end. These accounts are “use-it-or-lose-it,” meaning unused funds may be forfeited after December 31 (though some employers offer a small rollover or grace period).
Consider using FSA funds for eligible medical expenses such as dental checkups, eye exams, prescription glasses, or over-the-counter medications. It’s better to spend the money on health needs now than to lose it later.
7. Pay Deductible Expenses Early
If you itemize your deductions, consider prepaying certain deductible expenses before the year ends. Examples include property taxes, mortgage interest, or medical expenses that exceed a certain percentage of your income.
This strategy—often called “bunching deductions”—helps you maximize the benefit in years when you expect to exceed the standard deduction. For instance, if you expect higher expenses next year, you can defer some payments. But if your income is higher this year, accelerating deductions may be more effective.
8. Review Your Business Expenses (for Self-Employed Individuals)
For freelancers, small business owners, or gig workers, now is the time to ensure your books are in order. Review expenses such as office supplies, software, advertising, or business-related travel. You can also make last-minute purchases for deductible business items before December 31 to reduce taxable profit.
Don’t forget to record your mileage, home office expenses, and any depreciation if you use equipment for work. Keeping detailed records and receipts can protect you during an audit and help maximize your deductions.
9. Check Eligibility for Tax Credits
Several valuable tax credits can reduce your tax liability dollar for dollar. Review whether you qualify for the Child Tax Credit, Earned Income Tax Credit, or energy-efficient home improvement credits. If you made green home upgrades, installed solar panels, or purchased an electric vehicle, you might be eligible for additional credits.
Credits are generally more powerful than deductions because they directly reduce the amount you owe—so check your eligibility before filing.
10. Plan for Estimated Taxes and Next Year’s Strategy
Finally, use your year-end review as an opportunity to prepare for next year. Adjust your estimated payments or withholding to reflect your expected income. If you received a large refund last year, that means too much money was withheld—consider lowering it to improve cash flow.
Set reminders for key tax deadlines, review any changes in tax law for 2026, and talk with a professional if your financial situation is complex. The earlier you plan, the easier it becomes to manage your taxes effectively.
Conclusion
The last few weeks of the year present a valuable opportunity to make proactive tax decisions. By reviewing your income, maximizing deductions, contributing to retirement accounts, and taking advantage of available credits, you can significantly reduce your 2025 tax bill.
Good year-end tax planning isn’t just about saving money—it’s about gaining control and confidence in your financial future. Acting before December 31 ensures you’ll start the new year in a stronger financial position and avoid the stress of last-minute surprises when tax season arrives.
