The critical time for tax planning is before the tax year ends. Of course, I think you should be thinking about tax planning all year, but year end is when we can adjust any portion of our strategy that may have gotten off track due to market behavior or rule changes. Let’s discuss those two things for year-end 2025.
Year-End Planning as TCJA is replaced by OBBBA
In July 2025, the "One Big Beautiful Bill" Act of 2025 (OBBBA) became law. The OBBBA made permanent the tax rates and AMT income exemption amounts of the Tax Cuts & Jobs Act (TCJA) that were set to expire at the end of 2025
Under the TCJA, the standard deduction for joint filers in 2024 was $29,200. The OBBBA increased the joint filer’s standard deduction for 2025 to $31,500. The TCJA allowed for a limit on state and local tax (SALT) deductions of $10,000 and on mortgage interest up to a balance of $750,000, with a few exceptions. The OBBBA increases the 2025 SALT limit to $40,000 for taxpayers who itemize their deductions on Schedule A and who make less than $500,000. The deduction rises 1% per year until 2030, at which time it is set to return to $10,000.
Long-term capital gains taxes remain largely unchanged in the new bill. The bracket amounts differ, but they aren't very different. For example, the top tax bracket for long-term capital gains is 20% above $533,400 for single filers.
Market Volatility: Opportunities And Risks
With all the stock-price volatility in recent years, it's a good idea to regularly monitor your employee equity holdings for the kind of tax-saving and portfolio-management opportunities that market moves can present.
Inflation accelerated in 2022 and persisted at levels above the Federal Reserve's target of 2% into 2024. Tarriff policies under the Trump administration have maintained upward pressure on prices in 2025. Never the less, the Fed cut rates by 0.50% in the third quarter of 2024 and by an additional 0.25% in both September and October of 2025. Market prognosticators expect another rate cut in December.
The biggest challenge for financial planning is this: we live in a slow-growth, interest-rate-constrained, volatile world where we may have lower return expectations and, thanks to medical advancements, longer life spans. I believe it is more important than ever to adhere to conservative principles of tax management and portfolio balance that we know make common sense in any market.
With all that as a background, for 2025 there is still time for tax planning before year-end. Below are some things to consider.
NQSOs And Restricted Stock: Little You Can Do
The spread between the exercise price and the market price of nonqualified stock options (NQSOs) is taxed as ordinary income at exercise (as is the value of restricted stock at vesting), and the tax is fixed on that date. If you know your tax bracket will be higher this year, because an exercise will push your marginal income into the highest rate, you may want to consider straddling years for your NQSO exercise to take the compensation income in the lower-tax year, going just up to the 37% threshold but not over it.
With restricted stock or restricted stock units, you usually have no flexibility in choosing the tax year, as the vesting date is set, but you may be able to defer the tax consequence by designating the vesting to a deferred compensation plan. Beware of building up a concentration of company stock in your deferred comp plan, though. Market drops can cost as much or more than tax bills.
With NQSOs, unlike with ISOs, nothing at year-end can change the tax impact of your exercise earlier in the year, regardless of whether your company's stock price has dropped (or risen) since you exercised. After you exercise and hold NQSO stock, the holding period begins, and it is simply stock with no special tax status. Evaluate it like any other investment (a similar analysis applies to restricted stock after it vests). When you sell the shares, the rules of capital gains tax apply.
A lot of temporary tax breaks were enacted way back in 2021 during the pandemic. Almost all of them expired in 2022. A useful one that remains is the Lifetime Learning Credit, which is worth 20% of the first $10,000 in qualified education expenses. The value of the LLC is also a credit that is limited by your income. For 2025, you can claim up to the full credit if your Modified Adjusted Gross Income (MAGI) is $80,000 or less for single filers and $160,000 or less for joint filers. A phaseout of the benefit means that you won't be able to claim the LLC once your MAGI reaches $90,000 for single filers or $180,000 for joint filers
If you can postpone a planned NQSO exercise into 2026 and, by doing so, keep yourself under these thresholds, you can claim the tax-associated credits.
For NQSO-holders who have already maxed out their Social Security tax by earning over $176,100 in 2025, any additional exercises before the end of the year will occur without Social Security withholding, letting you keep an additional 6.2% of the spread. Remember that, as stated above, the Medicare tax is 2.35% for single taxpayers earning over $200,000 ($250,000 for married joint filers), and a Medicare surtax of 3.8% on investment income also applies to those same taxpayers.
Planning Ideas
Special year-end tax moves for option holders generally apply more to incentive stock options (ISOs), discussed below. With these thoughts in mind, add the following items to your planning between now and the end of the year.
Taxes Should Not Drive Decisions
Remember to never base any decisions solely on taxes or expected future tax rates. If in December you sell at $20, merely to "take advantage" of your loss for stock exercised at $30 per share earlier in March, you lose the opportunity for future appreciation in the stock. Should it double to $40 by the following June, you will miss out on a gain of $20 per share. This is one reason why you should almost never make exercise or sale decisions based solely on tax considerations.
You should always base exercise and stock-sale decisions on a determination that your company stock has peaked, on a need for money, or on a desire to seek diversification. You may come to these conclusions by a number of paths but "buy low, sell high" is still the only way to make money in the market. Yes, your profits will be taxed, but you'll never build wealth by taking losses! You may reduce your income taxes with a year-end sale, but you eliminate your real opportunity to make money over the long run.
Be Sure You Can Pay Your Taxes
Always double-check that you will have the money to pay your taxes. You may owe some income tax beyond what your company withheld at exercise or at vesting with restricted stock/RSUs. When you exercise NQSOs or when your restricted stock/RSU grants vest, your company withholds federal, state, and Social Security taxes.
Potential Withholding Shortfall
Most companies withhold federal tax at only the minimum required federal supplemental income withholding flat rate of 22% (37% for total yearly amounts of supplemental income in excess of $1 million). If you are in a higher tax bracket, you may owe the additional amount with your tax return (or through estimated taxes), unless you're fortunate enough to have made more than $1 million in supplemental income.
For nonemployees (e.g. consultants or contractors), the company might not have withheld taxes at all, in which case you should expect to receive an IRS Form 1099-NEC that reports the income. Ask your accountant or financial advisor to estimate your tax liability and then make sure you can cover it. This may mean you will need to pay estimated taxes and/or sell more stock this year, but at least you will be confident of your ability to pay taxes.
Sell Losers
Despite the long market recovery, because of volatility you may still have some shares whose prices are significantly below what you paid for them. Consider selling stocks that have lost value, but only when you expect the stock to continue to lose value. The best reason to sell a stock is that it's no longer a good investment. You may even want to sell the stock if you think it is not going to appreciate as quickly as alternative investments. If you expect only a small recovery in your stock but believe the market is going to appreciate substantially, sell, harvest the losses, and purchase something else.
Know The Rules On Loss Deductions
Consider stock sales that generate losses to deduct. If stock acquired from an option exercise or restricted stock/RSU vesting is now worth $5,000 less, the sale will generate a $5,000 capital loss. This may reduce your tax liability, but whether the deduction is immediately usable depends on the rest of your tax situation, including the gains and losses from other stock sales and loss carryforwards from prior years.
The OBBBA tax law didn't change capital gains rules. You can offset losses only against the same type of income. This means you cannot use a $5,000 capital loss to offset $5,000 of your salary. However, you can use the $5,000 capital loss to offset a $5,000 capital gain.
There is one small exception to the "matching" rule. You can use up to $3,000 of capital loss to offset $3,000 of ordinary income, carrying forward any unused losses to next year. Therefore, if you sell only enough stock to generate $3,000 of capital loss, you will most likely get a deduction for the full amount. If it turns out that your tax rates are eventually higher in 2025 and beyond, consider one "benefit" you may not have thought about: higher rates make loss carryforwards more valuable to offset against ordinary income. Current tax rules allow write-offs against ordinary income up to $3,000. In the top 37% bracket, the offset will be worth $1,110.
If you think your company's stock is overvalued or you are overconcentrated in it, consider taking capital gains by year-end to use up losses from this year or losses carried forward from prior years. You should pay close attention, as we approach year-end, for an opportunity to sell at a loss those appreciated shares along with an offsetting number of shares from previous vesting and exercises. This will help you diversify, raise cash, and position yourself for what may come.
Sell If You Need Money
Even with the tax changes, your stock gain at sale is taxed at the long-term capital gains rate of only 15% or 20% (depending on your adjusted gross income) when you have held the shares for more than one year. Capital gains are still preferable to ordinary income.
Should you need money to pay for your child's college tuition in January, sell stock. While we're (again) on the subject of college tuition, the American Opportunity higher-education credit (AOC)—which offers up to $2,500 annually per student for four years of college and covers tuition, room, board, and books—is still available. The credit begins to phase out at $80,000 of AGI ($160,000 for joint filers). If the credit is more than your income-tax liability, 40% of it is refundable. Also, the full credit is allowed against the AMT.
Alert: You cannot use the AOC and the previously mentioned LLC for the same student in your household, but the two credits can be mixed and matched for individual dependents.
Consider Gifting Stock To Relatives In Low Tax Brackets
In 2025 you may make annual gifts of $19,000 ($38,000 if you split the gift with a spouse) to any number of recipients without either affecting any portion of your lifetime gift tax exemption or paying gift tax. Financial planners often advise high-net-worth clients with substantial estates to consider making annual stock gifts before the end of the year, up to these amounts. Depending on the size of your estate at death, a strategy for making lifetime gifts can reduce your estate taxes, particularly if the value of the shares rises significantly after the gift. High-net-worth individuals should consider a grantor-retained annuity trust for their company stock.
The long-term capital gains tax rate on people in the 12% tax bracket is 0%. If you have adult children, who file their own tax returns and whose income is likely to be in the 12% tax bracket in 2024, they will pay 0% tax on long-term capital gains that don't cause their income to rise to the next bracket. Consider a gift of appreciated shares to them up to the annual gift limit before year-end.
Alert: The kiddie tax (i.e. your tax rates, not your children's) will apply to stock sales by your children under the age of 19 as well as college students under 24 unless the students provide over half of their own financial support from earned income.
Retirement Planning: It's Not Too Soon
Equity compensation exercise strategies should, ideally, be coordinated with your retirement planning (for thoughts on how best to do this, read my blog post Retirement Planning With Stock Compensation). It's not too soon to plan for future years or too late to make a retirement plan contribution for the previous year.
Even if you are covered by a retirement plan at work, such as a 401(k), you can still take a full IRA deduction for 2025 if your modified AGI is less than $79,000 ($126,000 for married joint filers). A partial deduction is allowed until your AGI reaches $89,000 ($146,000 for married joint filers).
For the 2025 tax year, the contribution limits for a Roth IRA are $7,000 for a person under 50, and $8,000 for a person who is 50 or older before the end of the year. To be eligible for maximum contributions in 2025, married joint filers must have MAGI of $236,000 or less, and single filers must have MAGI of $150,000 or less. The phaseout range for partial contributions extends from there up to an income ceiling of $246,000 for married joint filers and up to $165,000 for single filers. Beyond that point, contributions are not allowed.
Alert: Up to the filing deadline of your 2024 tax return in April 2026, you can make Roth IRA contributions that still count for the 2025 tax year. (IRS Publication 590-A has more information.)
If you are already contributing the maximum to your 401(k) at work or if you have additional compensation income this year from your stock option exercise or restricted stock/RSU vesting, making you ineligible to fund a Roth IRA or deductible IRA, you may want to consider funding a nondeductible IRA with the expectation that it can be converted to a Roth later. When you do convert your traditional IRA to a Roth IRA, you will owe ordinary income tax on the value of any tax-deductible IRA (speak with your tax advisor about the related calculation). Income from your stock compensation can help you pay this additional tax.
* All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost. Past performance does not guarantee future results. Investors should consider their financial ability to continue to purchase through periods of low price levels.
This blog is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
These examples mentioned above are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.