3 Year-End Tax Strategies for Retirees With $2 Million to $10 Million

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I swore I would never write another column specific to one piece of legislation because of its short shelf life in the ever-changing political landscape. However …

There were enough changes in the planning strategies stemming from the One Big Beautiful Bill (expect a cosmetic name change before the midterms) that I thought it would be a disservice to leave my followers in the dark.

We've done our year-end reviews early because most custodians have to execute transactions before the IRS deadline of December 31. Much of this work requires calculations that take some time.

Here are the strategies our clients with $2 million to $10 million are looking at by the end of the year:

1. Different Roth conversion calculations and considerations

I've equated a Roth conversion calculation to walking across a busy street. Look left for income tax rates, look right for capital gains thresholds. Look both ways for electric scooters. In this analogy, Medicare IRMAA brackets.

Now there's a fourth threat: phaseouts on a few of the tax breaks created by OBBB.

The two that we saw come up multiple times in our reviews were the enhanced senior deduction phaseout and the SALT (state and local taxes) cap expansion phaseout. The enhanced senior deduction adds a $12,000 deduction for a married couple, if both are at least age 65.

However, that additional deduction starts to phase out at $150,000 of income. It disappears at $250,000 of income.

A Roth conversion might cost more than the marginal rate if we accidentally breach this threshold. That doesn't mean it's not worth doing.

You might wonder why I attached an asset level of $2 million to $10 million. Many of our clients fall within this range, and portfolios of this size, depending on where the money is held, can make some of these thresholds easy to hit.

Next one on our list is the temporary SALT cap increase. It increases the cap on the deduction for SALT to $40,000 retroactively to the beginning of 2025 through 2029.

However, a phaseout of that deduction starts at $500,000 of income and reverts to $10,000 at $600,000 of income (joint). A Roth conversion might cost more if we cross the line.

These new rules have made calculations more difficult because of the nuanced rules and sheer number of landmines.

We rely on tax-planning software to load a prior year's return, change the tax year to 2025 and see the impact of the new rules.

2. Charitable bunching

Bunching became popular with the advent of the Tax Cuts and Jobs Act (TCJA) in 2018. Because of the SALT cap of $10,000 and higher standard deductions, a much smaller percentage of wealthy taxpayers itemize deductions.

We would often "bunch" or "stack" deductions in one year to get over the standard deduction hurdle. The taxpayer would make several years of charitable gifts in one year, often using a donor-advised fund (DAF). Our clients would then go back to the standard deduction in subsequent years.

This is not a new strategy, but it has become more important because more people will itemize under the expanded SALT cap and because there is a 0.5% floor on charitable giving starting in 2026.

Think of that floor like the floor on medical expenses. If a client has $100,000 in adjusted gross income (AGI) and wants to give $4,000, only $3,500 of it would be deductible on Schedule A, because of that floor.

This makes the charitable bunching strategy even more important, as the higher you go with the gift, the more inconsequential that hurdle becomes.

If you're close to the standard deduction threshold, this strategy will become even more beneficial if you revert to the standard deduction in 2026. Starting in 2026, there is an additional $2,000 (joint) charitable deduction available for those who take the standard deduction.

We rely on financial planning software to look forward several years and try to figure out if our clients should be itemizing or taking the standard deduction. Unlike the tax software I referenced, we make a free version of this software.

3. Energy projects

We had several clients scrambling to make the electric car credit deadline of September 30. However, there are credits still available for projects completed by December 31.

These credits have fairly low caps, so you should do one of these projects only if you were otherwise already considering it. The energy-efficient home improvement credit is outlined under IRS Section 25C.

This credit allows you to deduct a certain percentage of materials costs for such things as energy-efficient windows, air conditioning units, etc.

As I think of all these caps, phaseouts and rules, I'm picturing a stack of dominos that my 3-year-old lines up on the living room floor. Accidentally knock one over, and the whole line goes down.

Perhaps that's extreme, but it's now even more important to make sure you don't ruin your strategy by inadvertently pushing over one domino.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.