Tax Strategies to Maximize Deductions and Reduce Liability

If your tax plan only surfaces during filing season, you’re likely leaving money on the table. With the passage of the One Big Beautiful Bill Act (OBBBA) in mid-2025, taxpayers now have more options when it comes to year-round tax planning. The law locks in many of the 2017 Tax Cuts and Jobs Act (TCJA) provisions and introduces new strategies that can reduce liability and help manage income more effectively over time.

From updated deduction thresholds to changes in the Alternative Minimum Tax (AMT), the 2025 rules give proactive taxpayers more control. Let’s walk through the highlights that matter most this year.

Lower Individual Tax Rates, but Watch for AMT

The OBBBA made the TCJA’s reduced individual tax rates permanent, applying these lower rates to ordinary income such as wages, self-employment earnings, business income, interest and distributions from tax-deferred retirement accounts. However, the legislation didn’t change payroll taxes and only partially adjusted the AMT.

While fewer people may fall under AMT due to its permanently raised exemption, changes beginning in 2026 will increase how quickly the exemption phases out. Taxpayers with substantial long-term capital gains or large state tax deductions could still be pulled in. It’s worth working with a tax professional to assess AMT exposure before taking major income, deduction or investment actions.

A Bigger, Inflation-Adjusted Standard Deduction

For many filers, the higher standard deduction will remain the better choice over itemizing. The OBBBA slightly increases the standard deduction for 2025 and adjusts it annually for inflation going forward.

This shift simplifies filing, but it also affects strategy. For example, taxpayers may now benefit from “bunching” deductible expenses (such as charitable giving or medical expenses) into a single year to exceed the standard deduction threshold. In other years, they may claim the standard deduction instead. Timing becomes critical.

Let’s look at a simple example. Suppose a taxpayer donates $30,000 to qualified charities annually. If they continue to give $30,000 per year and take the standard deduction (let’s assume $31,500 for a married couple filing jointly in 2025, based on projected inflation adjustments), they don’t exceed the threshold for itemizing and lose the tax benefit of those charitable contributions.

But if instead, they contribute $60,000 in one year and skip charitable donations the next, they could itemize in the high-giving year and claim the standard deduction the following year. Over two years, their total deductions would be:

• Year 1: $60,000 in charitable donations (itemized deduction)
• Year 2: $31,500 standard deduction
• Total two-year deductions: $91,500

Compare that to $30,000/year of charitable giving with the standard deduction each year, and you only have $63,000 of total deductions. In this case, bunching increases the deductible benefits by $28,500 over two years.

One practical way to execute this is with a donor-advised fund (DAF). A DAF allows a taxpayer to make a large, single-year donation (and take the full deduction), then distribute grants to charities over time. So, in the above scenario, they could contribute $63,000 to a DAF in Year 1, receive the deduction that year, and still support charities annually, even during a zero-deduction year.

This strategy keeps charitable giving consistent, while optimizing tax outcomes under the new standard deduction thresholds. We recommend reviewing your giving plans early each year to see if this approach can work for you.

SALT Deduction Cap Raised Significantly

One of the most impactful OBBBA changes is the increase in the SALT (state and local taxes) deduction cap. The previous $10,000 limit has risen to $40,000 ($20,000 for separate filers), though income-based phaseouts apply for those earning more than $500,000 ($250,000 for separate filers). The cap reduction is calculated at 30% of the excess over the threshold, but it will not fall below $10,000.

This change reopens deduction timing opportunities, especially for property taxes. If you expect to fall under the phaseout threshold, prepaying 2026 property taxes in 2025—assuming the bill has been assessed—could yield significant tax savings.

These limits will rise by 1% annually through 2029. Absent new legislation, they return to the $10,000 cap in 2030.

Expanded Timing Strategies for Income and Expenses

The timing of income and expenses remains a key tool for managing tax liability. The general approach is straightforward: defer income when you expect lower rates in the future, and accelerate deductions when they’ll offer more value at higher rates.

Controllable income items may include:

• Bonuses
• Self-employment income
• Treasury bill income
• Retirement distributions (when not penalized)

Common deductible expenses to consider for timing:

• Property taxes
• Mortgage interest
• Investment interest

• Charitable contributions

Taxpayers can work with their CPA to structure timing strategies that reflect their tax bracket forecasts and AMT risk. For example, if you expect to move into a higher bracket this year, taking income now may reduce overall tax liability.

Key Deduction Changes and Limits

The OBBBA made several deduction-related changes that affect planning:

• SALT deduction: Expanded as noted above, with phaseouts for high-income taxpayers.
• Miscellaneous itemized deductions: Permanently eliminated unless tied to federally declared disasters.
• New deduction for educator expenses: A broader, itemized version of the above-the-line $300 deduction.
• Overall limit on itemized deductions: Begins in 2026 for those in the 37% tax bracket. The value of deductions for these taxpayers will be calculated as if they were in the 35% bracket.

This upcoming limitation means those in the top bracket should consider accelerating deductions into 2025 to preserve full tax benefit.

Four New Deductions Introduced for the 2025 Tax Year

The OBBBA added four temporary deductions beginning in 2025 that apply broadly but include income-based phaseouts:

1. Tips income deduction: Up to $25,000 deductible, phased out between $150,000–$400,000 of MAGI.
2. Overtime pay deduction: Up to $25,000 deductible for joint filers, phased out between $300,000–$550,000 MAGI.
3. Car loan interest deduction: Up to $10,000 deductible on loans for qualified U.S.-assembled vehicles, with a phaseout starting at $100,000 MAGI.
4. Senior deduction: Temporary $6,000 deduction for taxpayers age 65 and older, phased out at relatively lower income thresholds.

These deductions are only authorized through 2028 unless extended.

Above-the-Line Deductions Remain Valuable

Above-the-line deductions reduce both AGI and MAGI, affecting eligibility for other credits and limits. These include:

• Deductible IRA contributions
• Self-employed health insurance
• HSA contributions (if not already deducted via payroll)
• Self-employment expenses

Even if you do not itemize, these deductions can make a significant impact. The Qualified Business Income (QBI) deduction for pass-through businesses, while not technically above-the-line, also remains available and can reduce taxable income substantially.

To explore entity-specific opportunities, check out our business advisory services.

Medical Expenses and Health Accounts

Medical expense deductions are still subject to the 7.5% of AGI floor, making them hard to claim for many filers. Bunching expenses into one year can help exceed this threshold.

Eligible expenses include:

• Insurance premiums
• Long-term care insurance (subject to limits)
• Medical services
• Prescription drugs

• Mileage for medical travel

Alternatively, tax-advantaged accounts such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) allow for pre-tax contributions and reimbursements for qualified expenses. HSAs in particular offer triple tax advantages and can serve as long-term health planning tools.

Payroll and Medicare Tax Planning

The OBBBA did not change payroll taxes, which continue to apply to all earned income. High earners should be aware of the additional 0.9% Medicare tax, triggered at $200,000 for single filers and $250,000 for joint filers. This tax has no employer match and is not deductible.

If you have fluctuating income, you may be able to minimize exposure to this tax through timing strategies like deferring bonuses, adjusting distributions or spreading contract payments.

Owner-employees should also review how their business structure affects payroll tax obligations. For example, S corporation shareholders may save by taking reasonable salaries with the remainder as distributions, which are not subject to payroll tax. The IRS scrutinizes this carefully, so documentation and planning are key.

Estimated Payments and Avoiding Penalties

Taxpayers must meet minimum payment rules throughout the year or face penalties. With the increased complexity of deduction limits and income thresholds, more filers are at risk of underpayment.

What’s more, the cost of getting this wrong is climbing. The IRS underpayment penalty rate, which is calculated quarterly, has increased sharply in recent years alongside broader interest rate hikes. Here’s a quick look at how those rates have changed:

• 2021: 3%
• 2022: Rose from 3% in Q1 to 6% by Q4
• 2023: Increased further, ending the year at 8%
• 2024: Held steady at 8%
• 2025 (as of Q1): 8% and expected to remain until further notice

 

These are the highest rates we’ve seen in over 15 years. For taxpayers who miss or miscalculate their quarterly payments, the financial hit can add up quickly.

Strategies to avoid penalties include:

• Increasing withholding on year-end bonuses – Withholding is treated as if paid evenly throughout the year, so this can help cover earlier shortfalls.
• Using the annualized income installment method – Particularly helpful for business owners or taxpayers with uneven income, this method adjusts quarterly payments based on when income is actually received.

• Making up shortfalls through withholding – Even late-year adjustments to paycheck or retirement withholding can help avoid penalties more effectively than estimated tax payments.

The IRS Tax Withholding Estimator is a useful tool to help determine whether your current withholding is sufficient.

Plan Now to Stay Ahead

Tax rules for 2025 offer new possibilities in tax planning, but they also introduce several income and deduction phaseouts that make the process more complex. Taking time to adjust your strategy now can preserve deductions, avoid penalties and lower your overall tax burden.

Contact a James Moore professional to find out how these changes apply to your situation. With year-round planning and the right support, your tax strategy can do far more than meet compliance; it can help you build lasting value.

 

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