Dec 1, 2025
Our tax system is more complicated than ever, with the income tax law and regulations ballooning to over 70,000 pages, according to the taxfoundation.org.
Luckily, we have an industry of tax advisors to help, software to focus on the ins and outs of deductions and credits. Some things have actually been simplified for many families in the last decade due to the doubling of the standard deduction. However, even with this simplification, there are actionable annual strategies that one should consider in order to minimize tax burdens over time, and to take account of their current and projected tax brackets.
Harvesting losses or gains if appropriate to create balance.
The government is willing to wait to collect taxes on investment gains until the crucial realization point when that investment is sold. At that moment, they will collect a share of the profits. Their share is determined by a few different factors though, some of which are under the control of the investor. Those factors include the marginal tax rate of the investor, how long the investment has been held, and whether or not the investor has losses that offset the gains.
That’s right, even investments that have gone down to zero still have some value, because their losses can offset gains made elsewhere. That value is why selling at a loss can still be referred to as a “harvest.” One needs to be careful when using this strategy though, as you can’t do it with stocks you intend to repurchase. That is known as a “wash-sale,” and the IRS rules dictate that for 30 days you cannot buy another security that is “substantially identical” to the one you sold and recognize the capital loss on the sale. If one has purchased stocks over multiple years, each lot will have a different tax basis. One needs to specify which lot to sell based on the income and tax situation prevailing at that time. The default is “first in, first out,” but to harvest more or fewer gains or losses, one can choose which lots match one’s needs. Should there be many realized losses during the year, one might make sales of some of winners in order to not pay taxes on those gains. However, missing out on gains can be bigger than the taxes saved. Additionally, one might harvest winners if income is low enough to have the lowest or lower tax rate apply.
Consider annual partial Roth-IRA conversions.
If you are considering your income tax bracket when it comes to selling your securities, you may also con- sider how the government takes some of those decisions out of your hands as you get older, with required minimum distributions from tax- deferred accounts such as traditional IRAs or 401(k)s. Income taxes weren’t paid on these savings initially, and the government would like to start collecting those taxes once the owner reaches 73. There are no such requirements for Roth IRAs because the income taxes on those savings are paid upfront.
So, if one is currently in a low-income bracket approaching retirement and expects to be in a higher income bracket during retirement, he or she may want to consider taking on some of those tax obligations early, through partial Roth conversions. Paying the tax early does mean less time in the market for those accounts to grow; however, it may also mean lower taxes on Social Security benefits later on.
It’s about more than just taxes.
Small tax gains over time, invested with reasonable growth, can create a meaningful difference when retirement comes. That’s why it’s important to start these tax moves early, so the range of choices to fulfill tax obligations later on makes tax-efficient choices easier to make.
Year-end gift planning
Typically, tax considerations are not on the mind of someone making a large gift. The vast majority of gifts incur no gift taxes or even gift tax reporting requirements. It is more common to think of taxes when making bequests — and in those cases, people think of inheritance or estate taxes. This year, the One Big Beautiful Bill Act (OBBBA) was enacted on July 4, making the federal estate tax exemption permanent starting in 2026, at $15 million (up to $30 million with portability for a married couple). Only a very small number of taxpayers must worry about federal estate and gift taxes moving forward. Even so, there is value in the gifting strategies to lower an estate tax obligation because they also have the potential of lowering income taxes. Over a long period of time and growth, that can add up to a tidy sum.
Tax pros and cons of gifting
On the pro side of things, one can gift up to $19,000 each year to any recipient (up to $38,000 for a married couple) without the need for a gift tax return. Larger gifts will require a gift tax return, and that will reduce the future estate tax exemption. As far as the IRS is concerned, up to $15 million may be gifted during lifetime without incurring taxes.
Consider this simplified example: John has $10 mil- lion, and four grandchildren who are all currently in their teens to early 20s, and who are in the lowest income tax bracket. John is currently in the highest tax bracket, and these assets are all producing taxable income for him every year. Should John give $19,000 to each grandchild for 10 years, he will have given away $760,000 without incurring any gift tax or reducing his future estate tax exemption. The grandkids can collect the income that the assets were going to produce anyway, in their lowest tax bracket instead of the highest.
Gifted assets carry the donor’s basis with them. If these are highly appreciated assets, the grandkids will have a potential capital gains tax exposure. On the other hand, if they sell assets while they are in the bottom bracket, the tax rate on long-term capital gains is 0%.
A big caveat—with the larger exemption made permanent, basis step-up planning will become more important to some families. Inherited assets have as their tax basis their fair market value as of the date of death of the owner. This rule is generous—taxes on capital gains are effectively forgiven forever.
Let’s change the earlier example: John’s investment portfolio is worth $10 million, with a tax basis of $4 million. He plans to divide the portfolio among the four grandchildren. If he makes a lifetime gift of the securities, and assuming that the basis is divided equally, each grandchild will have to plan for taxes on $1,500,000 worth of gains if those assets are sold. If John holds the assets until his death, the tax on the $6 million capital gain is eliminated at zero estate tax cost. The income tax savings for shifting income during John’s remaining lifetime may not be worth as much as the basis step-up on his assets after he passes away if he holds onto them until death.
For the philanthropically minded, charitable gifts get a permanent tax break from the new law too.
There is good news for charitable giving in the new tax law —the increase in the deduction limit for charitable gifts, from 50% of the donor’s AGI to 60%, enacted in the Tax Cuts and Jobs Act of 2017, was made permanent, so it won’t expire at the end of the year. Unused deductions from larger charitable gifts may be carried forward for five tax years (but the carry forward expires at death).
One might also consider a gifting strategy of Qualified Charitable Distributions (QCDs) from IRAs if they are age 701⁄2 and older in 2025. In 2025, QCDs can be made up to $108,000 per individual. QCDs satisfy required minimum distribution mandates from qualified retirement plans for those 73 and older.
How to ensure a long-term perspective
There are many people who can go with a DIY approach and be very successful managing a portfolio on their long- term wealth journey. However, it can be helpful to find out what all the boxes are that the professionals usually review, not just once during setup, but every year. A second opinion can be helpful even for those doing everything right, we can do just that. They can take a look and make suggestions to help you make informed decisions. Let us know if you’d like to schedule a meeting.
