Your 2025 tax planning checklist: Essential moves for high earners

Your 2025 tax planning checklist: Essential moves for high earners

Tax strategy doesn’t just happen in April. While it may feel like you just filed your 2024 taxes a minute ago, the time to set yourself up for success in your 2025 taxes is now.

High-income households face major tax changes in 2025, with opportunities to save thousands through strategic planning. By implementing advanced tax strategies like setting up a backdoor Roth IRA, understanding AMT implications, and maximizing the expanded SALT deduction cap, you could significantly reduce your tax burden before year-end—but you need to start taking action now to implement these before Dec. 31 to reap the benefits this year. Range shares how high earners can prepare for the 2025 tax season now.

Should You Itemize Deductions?

Most high earners with complex wealth would benefit from itemizing deductions, especially with newly expanded tax deduction opportunities for 2025.

To know whether you should itemize deductions, you’ll need to compare your potential itemized deductions to the standard deduction amounts.

Standard Deduction Amounts

In recent years, about 90% of taxpayers took the standard deduction rather than itemizing—though the expanded SALT cap and other available deductions make the case for itemizing deductions compelling for most high earners.

Base Standard Deductions

• Single: $15,750
• Head of Household: $23,625
• Married Filing Jointly: $31,500

The Backdoor Roth Strategy: Tax-Free Growth for High Earners

Understanding the Backdoor Roth Opportunity

The backdoor Roth IRA is a legal tax strategy that allows high earners to bypass income limits and access tax-free growth through a Roth IRA. For 2025, if your income exceeds $165,000 (single) or $246,000 (married filing jointly), you cannot contribute directly to a Roth IRA, but a backdoor Roth can help you access Roth benefits.

How the Backdoor Roth Works

1. Contribute to Traditional IRA: Make a nondeductible contribution up to $7,000.
2. Convert to Roth IRA: Transfer the funds to a Roth IRA (ideally immediately).
3. Enjoy Tax-Free Growth: All future gains grow and can be withdrawn tax-free.

The Tax Benefits Could Be Substantial: A $7,000 annual backdoor Roth contribution growing at an assumed annual rate of 7% could become approximately $287,000 tax-free in 20 years. If you instead invested the same amount in a brokerage account, you’d owe long-term capital gains taxes on about $147,000 of growth—potentially costing you close to $30,000 in taxes (plus tax on any interest and dividends earned along the way). With a Roth IRA, every dollar of your investment growth can be withdrawn tax-free, while a brokerage account requires you to pay taxes on your gains, potentially reducing your final nest egg significantly.

Advanced Backdoor Roth Strategies

The Mega Backdoor Roth

For those with compatible 401(k) plans, the mega backdoor Roth allows annual contributions up to $46,500 beyond the $7,000 limit. This strategy uses after-tax 401(k) contributions converted to Roth, providing massive tax-free growth potential.

Pro-Rata Rule Planning

The pro-rata rule can complicate backdoor Roth conversions if you have existing pre-tax IRA balances. Every dollar converted is taxed proportionally based on your total IRA assets. You could navigate this by:

• Rolling pre-tax IRA funds into employer 401(k) plans.
• Timing Roth conversions for lower-income years.
• Timing for years when you’re working towards earning back an alternative minimum tax credit.
• Calculating exact tax implications before executing.

Multi-Year Roth Conversion Ladders

For members with large traditional IRA balances, systematic partial conversions over multiple years can minimize tax impact while maximizing long-term tax-free growth. This requires careful tax bracket management and coordination with other income sources.

Alternative Minimum Tax (AMT): The Hidden Tax That Catches High Earners

What Is AMT and Why It Matters

Alternative minimum tax is a parallel tax system that requires some taxpayers to calculate taxes twice—once under regular rules and once under AMT rules—then pay whichever is higher. Originally designed to ensure wealthy taxpayers pay their "fair share," AMT now impacts many professionals with equity compensation, particularly those exercising incentive stock options (ISOs).

AMT Calculation Basics

1. Start with regular taxable income.

2. Add back certain deductions and preference items.

3. Subtract AMT exemption ($137,000 for those married filing jointly, $88,100 for single filers).
Note that this exemption phases out at higher incomes, starting at $1.2 million for joint filers.

4. Apply AMT rates: 26% up to $232,600, then 28%.

5. Pay the higher of regular tax or AMT.

Key AMT Triggers for High Earners

Equity Compensation

The biggest AMT trigger for tech professionals is exercising ISOs. The "bargain element"—the difference between your strike price and fair market value at exercise—is counted toward your AMT calculation, even though this wouldn’t be taxed under the regular tax system.

Example: Exercise 10,000 ISOs with a $5 strike price when shares are worth $50:

• Bargain element: $450,000
• Potential AMT: $126,000
• No regular tax due until you sell

Other Common AMT Triggers

• State and local tax deductions (even with the expanded cap)
• Large mortgage interest on home equity debt
• Private activity bond interest
• Accelerated depreciation

How to Avoid Triggering AMT

Strategic ISO Exercise Timing

Optimize ISO exercises by:

• Calculating the exact number of shares to exercise without triggering AMT.
• Spreading exercises across multiple tax years.

Multi-State Considerations

Some states don't recognize AMT adjustments, creating additional complexity. California residents face particular challenges with ISO exercises, as the state taxes the bargain element regardless of federal AMT treatment.

SALT Deduction Expansion: Maximizing the $40,000 Opportunity

Understanding the New SALT Landscape

The State and Local Tax (SALT) deduction expanded from $10,000 to $40,000 in 2025, providing significant relief for residents of high-tax states. This quadrupling of the cap can save taxpayers in states like California, New York, and New Jersey thousands of dollars—but understanding the phase-out rules is important here.

SALT Phase Outs: Deduction Amounts Go Down As Income Increases

• The full $40,000 deduction is available to single and joint filers with a modified AGI up to $500,000.
• For every dollar above the $500,000 threshold, taxpayers lose 30% of the benefit for every dollar over the threshold.
• Taxpayers at $600,000 MAGI or above can deduct SALT up to a $10,000 cap.

Real-World SALT Optimization Examples

Example 1: California Tech Executive

• Income: $450,000
• California state taxes: $35,000
• Property taxes: $12,000
• Total SALT: $47,000

Result: Because income is below $500,000, you can deduct the full $40,000, saving around $14,800 versus the old $10,000 cap.

Example 2: New York Finance Professional

• Income: $550,000
• New York state taxes: $40,000
• New York City taxes: $15,000
• Property taxes: $18,000
• Total SALT: $73,000

Result: Because income is above $500,000, the SALT phase-out reduces the deduction to $25,000, saving around $5,500 versus the old $10,000 cap.

Advanced SALT Planning Strategies

For those near the $500,000 phase-out, implement strategies that seek to reduce MAGI:

• Maximize pre-tax 401(k) contributions ($23,500 is the contribution limit for 2025).
• Fully fund HSAs (2025 contribution limits: $4,300 individual, $8,550 family).
• Defer bonuses from December 2025 to January 2026.
• Accelerate business and property deductions.
• Time capital gains realizations carefully to limit your MAGI.
• Sell investments that are trading at a loss to take advantage of tax-loss harvesting.

Coordinating Strategies

The Power of Integration

These strategies work best when coordinated. Integrate tax planning with investment management to ensure every decision reinforces your overall wealth strategy.

Comprehensive Tax Optimization Example

Consider a software engineer with $480,000 income, ISO exercises pending, and an interest in backdoor Roth conversions:

1. SALT Preservation: Keep MAGI below $500,000 to maintain the full deduction.
2. AMT Management: Exercise ISOs up to the AMT threshold (around $50,000 bargain element).
3. Backdoor Roth: Contribute $7,000 and convert immediately.

Implementation Timeline

Before Dec. 31, 2025

• Execute backdoor Roth conversions.
• Complete strategic ISO exercises.
• Make final SALT payments.
• Sell investments that are trading at a loss to take advantage of tax-loss harvesting.

January 2026

• Fund a new year IRA for a backdoor Roth.
• Review AMT credit carryforwards.
• Plan Q1 estimated taxes.
• Adjust withholdings based on 2025 results.

Bonus: Gift and Estate Tax Exclusions in 2025

Tax strategy isn’t just about saving taxes this year; it’s also about minimizing your tax burden in the future. Taking advantage of the annual gift tax exclusion every year can help families reduce their future estate tax liability. This exclusion lets you give away a certain amount per recipient each year tax-free, while larger gifts count against your lifetime exemption (it is currently over $13 million per person).

Annual Gift Exclusion

• $19,000 per recipient, with an unlimited number of recipients.
• Married couples can split gifts, allowing for a combined $38,000. If gift-splitting, you must file IRS Form 709, but no tax is due unless your total lifetime gifts exceed the federal exemption.

529 Plan Superfunding

• Instead of gifting $19,000 per year to a 529 plan, you may contribute five times the annual exclusion amount in a single year, which is called "superfunding."
• For 2025: $19,000 x 5 = $95,000 per donor, per beneficiary.
• Married couple: $190,000 per beneficiary (combining exclusions).

Your 2025 Tax Action Checklist

Backdoor Roth Implementation

• Confirm your income exceeds Roth limits.
• Check for existing IRA balances (pro-rata rule).
• Open traditional and Roth IRA accounts if needed.
• Execute nondeductible contribution and conversion.
• Consider a mega backdoor if your 401(k) is eligible.

AMT Planning Steps

• Calculate potential AMT exposure.
• Model ISO exercise scenarios.
• Time exercises to minimize impact.
• Track AMT credits for future use.
• Coordinate with a tax professional on multistate issues.

SALT Optimization Moves

• Project year-end MAGI.
• Defer income if you’re near $500,000 MAGI.
• Pay state estimates by Dec. 31.
• Document all state and local tax payments.

Why Professional Guidance Makes the Difference

Complex tax strategies require precise execution and ongoing monitoring. Small mistakes—like forgetting the pro-rata rule or mistiming ISO exercises—can cost tens of thousands in unnecessary taxes.

Common Questions About 2025 Tax Strategies

Can I still benefit from expanded SALT if my income exceeds $600,000?

Unfortunately, no. The SALT deduction reverts to $10,000 once your MAGI reaches $600,000 (the SALT cap before the OBBBA).

What happens if I contribute to a Roth IRA directly by mistake?

If you discover you're over the income limit after contributing to a Roth IRA, you must remove the excess contribution plus earnings by Oct. 15 of the following year to avoid penalties.

How does AMT interact with the expanded SALT deduction?

The expanded SALT deduction provides no benefit under AMT calculation, as state and local taxes aren't deductible for AMT purposes. This makes AMT planning even more critical for high earners in high-tax states.

This story was produced by Range and reviewed and distributed by Stacker.