Last week, I highlighted the main tax law changes under the One Big Beautiful Bill. Now that you have context for what has changed, I am going to focus on three practical planning opportunities to consider going forward.
- State and Local Taxes – Previously, individuals were limited to $10,000 of state, local, and real estate taxes that were eligible to be deducted. This limitation adversely affects individuals in states with high income tax rates (California & New York) and those with significant real estate taxes (Texas & New Jersey). With the new tax law, the cap for deductible state & local taxes has been raised to $40,000. BUT… this amount is reduced if your income exceeds $500,000. From a planning perspective, if your annual income is likely between $500,000 – $600,000, then controlling the timing of realizing additional income (e.g. liquidating company stock or selling a rental property) and maximizing deductions (contributing to pre-tax 401ks, health savings accounts,& flexible spending accounts) become increasingly important. This also makes the concept of “tax-loss harvesting”, or realizing losses within your taxable investment accounts throughout the year, even more valuable to reduce the total income reported on your annual tax return.
- Charitable Contributions – “Clumping” donations into a high income year — such as when you sell shares in a tender offer, vest RSUs the year of an IPO, sell an investment property, or earn a large commission payout — remains an attractive tax planning opportunity. Leveraging tools like a Donor Advised Fund or a Charitable Trust allows you to maximize the tax benefit when you’re in the highest tax bracket. For example, a tax deduction when you are in the 37% Federal tax bracket means that for every $1 donated, your tax bill is reduced by $0.37. Now that there is a “hurdle” of 0.50% of your income to receive a tax benefit for your donations, the concept of “bunching” multiple years worth of charitable contributions within one tax year will become the optimal method of donating for those who are charitably-inclined.
- Exercising ISOs – Historically, in years when you had higher ordinary income, this was an ideal time to “go big” with exercising ISOs due to an expanded “gap” before AMT kicked in. Now that the AMT exemption begins phasing out at a lower income level ($626,350 → $500,000 for single filers, and $1,252,700 → $1,000,000 for joint filers), the ability for for high earners to exercise ISOs tax-free is now reduced. Running a tax projection when you’re approaching these levels is critical to assess the AMT implications of exercising additional ISOs. Note: The lower phaseout thresholds become effective after December 31, 2025. So no need to fear if you fall into this category for 2025, I share this to have on your radar for 2026 & beyond.
There are other planning opportunities for self-employed professionals and those thinking about transferring wealth to your children, but for this post, I wanted to focus on the areas that affect a vast majority of my clients. If you have questions or would like to chat about how this applies to your personal situation, I’d be happy to have a conversation to explore what planning opportunities are relevant to you.