It’s December and I finally made some decisions around tax planning for 2025. As your income grows higher and higher, tax planning becomes a core part of your long term strategy.
W-2 Income
I decided to defer about 1/4 of my income for 2025 in the company deferred compensation plan and I will also be contributing to my 401k which should bring up my deferrals to about 35% to 40% of my income.
I hope these deferrals will help lower my tax bracket down a notch but I won’t know that for sure because my income is variable with stock and cash bonuses on top of my salary. The trick is that I have no way to be sure what amount of money to defer because if I assume the highest possible payout amount and it doesn’t come to fruition, I will be deferring too much income. If I defer too little and we get huge bonus payouts, it won’t make much of a difference to my tax situation.
I based my deferrals on what we made last year and I hope that will work well in 2025 but there are no guarantees, especially if we sink into a deep recession with tariff man at the helm of the ship.
Tax Free Income
I have also been investing in municipal bonds and municipal bond ETFs to generate tax free income for my taxable accounts. Having cash reserves is a key principle I follow however the interest it was earning in my taxable account was bumping me up into the next tax bracket and that was painful so the interest income is now state and federal tax free.
W-2 Spouse Income
Our tax deferred retirement accounts are fairly hefty at this point but our taxable and Roth accounts need some love so I asked my wife to start pouring the max into her employer’s Roth 401k. We will lose the tax deferral benefit but we don’t need any more money in those accounts and her company offers zero match so it’s more of a strategic move than anything else.
Capital Gains & Dividend Stocks
There is no major strategy here other than to continue to invest in growth ETFs in our taxable accounts to leverage capital gains tax later on down the road and DRIP dividends so our stocks grow.
Rental Property Income
I am exploring some options on our rental property income but I doubt I’ll have anything in place for 2025 given we’re close to the end of the year already and I have many things on my plate right now including planning vacations for 2025, retirement planning, medical check ups, kid stuff, home repairs, and other things like planning for moving overseas.
Share The Wealth
What are your strategic tax moves? Let me know in the comments below!
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