While Tax Day is still a few months away, the end of the year is a good time to review your tax strategies. There are many key actions that need to be completed by December 31 to ensure that you are optimizing your taxes to the fullest.
Here is our 5-step guide for optimizing taxes by the end of the year.
Estimate how much you are likely to owe in taxes and make sure your withholdings are adequate so that you are not slapped with an unexpected tax bill during tax day. Some common pitfalls pertain to supplemental earnings such as RSUs or bonuses.
RSUs that vest are taxed at the marginal tax rate. However, company withholding is usually a flat 22% for incomes lesser than $1Million (and 37% for incomes over $1Million). This can often be lower than the marginal tax rates for well compensated tech employees. This means that there is a good chance you may end up owing more than was withheld when you file taxes in April.
Similarly, bonuses may also cause withholdings to be skewed. Employers can withhold a flat rate of 22% or they can use the aggregate method to withhold taxes at the same marginal rate as your regular paycheck. If they use the 22% rate, then you might be on the hook for additional taxes during tax time.
Therefore, estimating taxes early can help you bump up withholdings or proactively make estimated tax payments. This will prevent you from being hit by a hefty tax bill and running into sudden cash flow issues in April.
Check your 401K contributions to ensure you are maximizing your contributions by the end of the year. At the very least, contribute enough to receive your employer match. If your finances permit, try to contribute the maximum contributions allowed of $23,500 for 2025 ($31,000 if you are 50 and above).
Healthcare FSA contributions often tend to be ‘use it or lose it’ for the given year. Check whether your employer allows carryover or a grace period until March 15. If not, make sure you utilize your FSA contributions by Dec 31.
Dependent care FSA: Submit all receipts and complete your paperwork for daycare and after-school care before the annual deadline to make sure you get reimbursed for expenses incurred. Typically, the plan year ends on December 31 and you may have until March or April to submit claims. Familiarize yourself with the exact dates and deadlines pertaining to your plan.
High earners exceeding the Roth IRA income limits (phase-out ranges of $146,000–$161,000 for single filers and $230,000–$240,000 for married filing jointly) cannot put money directly into Roth accounts, which offer the benefit of allowing post-tax dollars to grow tax free. However, they can do a Backdoor Roth conversion by doing a 2-step process: (1) put money in a regular IRA (2) converting the regular IRA into a Roth IRA.
In 2024 and 2025 the Roth IRA contribution limits are $7,000 for those under age 50 and $8,000 for those 50 and above.
The deadline to contribute to a transitional IRA is April 15, 2026. However, it is best to complete both the contribution and conversion in the same calendar year (preferably by Dec 31 2025) to keep the process straightforward.
If you have any stocks or assets that are underperforming, you can sell these at a loss and use these losses to offset capital gains from other asset sales with tax loss harvesting. If the losses exceed the capital gains, you can also offset ordinary income upto $3000 per tax year, with any remaining losses carried over to the new year. If you want to maintain your asset allocations, you can buy a somewhat similar asset class at a lower price but avoid ‘wash sales’ which prohibit buying back ‘substantially identical’ assets.
Donate to your favorite causes by the end of the year. Your charitable contributions are tax deductible up to 60% of your Adjusted gross income (AGI), depending on type of donation and organization. If your company offers a match for charitable contributions, you can leverage that as well to benefit your charities of choice. Note that employer matches are not deductible on your tax returns.
You can also donate appreciated long term investments (that have been held for more than a year) to a qualified charity without having to recognize capital gains taxes.
As you approach December 31, review:
These year-end tax strategies can turn December into a month of smart, intentional choices rather than last-minute panic in April.
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