2025 Financial Planning: 8 Potential Tax Traps to Avoid

Courtesy of Sammons Institutional Group

As the financial and economic landscape evolves, taxpayers must remain vigilant against pitfalls that can derail their financial goals. In 2025, understanding the nuances of tax legislation and proactive planning can save individuals from potential mistakes. Here are eight 2025 tax traps to consider discussing with your clients.  

1. Overlooking Changes in Tax Brackets

Typically, tax bracket thresholds adjust each year due to inflation. This is done to avoid a concept known as bracket creep, which occurs when inflation pushes individuals into higher tax brackets. For 2025, keeping an eye on income thresholds is crucial. Misjudging your taxable income could push you into a higher bracket, triggering higher rates on portions of your income. There may be scenarios where income increases are higher than the inflation adjustment on income tax brackets. Over time, this could push you into higher tax brackets and a higher effective tax rate. One option to consider is deferring income to stay within a favorable bracket.

2. Ignoring Retirement Contribution Adjustments

To piggyback off the strategy of deferring income, the IRS periodically updates contribution limits for retirement accounts such as 401(k)s and IRAs. In 2025, if these limits increase and you don’t adjust your contributions, you might miss out on valuable tax advantages. Clients may want to maximize their contributions to leverage tax-deferred growth or immediate tax deductions. Don’t forget to consider the potential of using Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) as ways to use above-the-line tax deductions.  

3. Neglecting Required Minimum Distributions (RMDs) 

Starting in 2023, SECURE Act 2.0 increased the minimum age for taking RMDs to 73, with further changes scheduled in subsequent years. However, many taxpayers still overlook these mandatory withdrawals from traditional retirement accounts. If an individual is philanthropic-minded, using a Qualified Charitable Deduction (QCD) can satisfy their RMD and avoid a taxable event. Suppose an individual does not itemize their deductions. In that case, a QCD can effectively meet one’s charitable goals without creating a taxable event.  

4. Underestimating the Impact of Capital Gains Taxes 

Clients may consider capital gains tax rules if they plan to sell investments in 2025. Selling assets held for less than a year incurs short-term capital gains taxes, which are taxed as ordinary income. Strategic tax-loss harvesting and holding assets over a year can help minimize tax liability. In addition, they may want to be aware of the impact of end-of-the-year capital gains from open-ended mutual funds in non-qualified accounts. Often, these products may be distributed at the end of the year as capital gains. Examining non-qualified accounts and potential selling of assets can be vital to help ensure clients don’t see unfortunate tax surprises.  

5. Falling into the Alternative Minimum Tax (AMT) 

To ensure high-income earners pay their fair share, the AMT applies a parallel tax system with fewer deductions. Middle-income taxpayers with significant deductions, such as state taxes or considerable mortgage interest, might inadvertently trigger the AMT. Helping clients calculate their potential AMT liability could help prevent unpleasant surprises. 

6. Overlooking Education Tax Credits

Parents and students often miss out on credits like the American Opportunity Credit or the Lifetime Learning Credit. In 2025, ensure your educational expenses qualify, and retain all receipts for tuition, books, and supplies to claim these valuable credits. Don’t forget the potential state-based tax benefits of contributing to a 529. A 529 could be a tax-effective way to save and pay for a child or grandchild’s future education. Also, don’t forget about the new 529 to Roth conversion rule if you have a client that doesn’t need as much money to pay for higher education. This provision allows for the money saved in a 529 to jump-start an individual’s retirement plan. 

7. Failing to Plan for Estate and Gift Taxes 

Proactive estate planning is vital. Gifts made within the annual exclusion limit ($19,000 in 2025) avoid taxes and reduce the taxable estate. Remember, a married couple can both give $19,000 to a child without incurring a gift tax event. This means a married couple can give up to $38,000 to a child and still be below the gift tax limit for 2025. In addition, as legislation changes, it may be helpful to review your client’s estate plan periodically to make sure their plan stays legislatively efficient. 

8. Mismanaging Health Savings Accounts (HSAs) 

HSAs offer multiple benefits: contributions are deductible, growth is tax-free, and withdrawals for qualified expenses are untaxed. Many taxpayers miss maximizing these contributions or improperly use the funds, resulting in lost tax savings. It’s crucial to keep all healthcare receipts, as past health costs can be used in the future to withdraw assets from HSAs. If an individual is detail-oriented, they can save current and past health expenses and use them to draw out HSA money tax-free in the future. This can be an additional source of untaxed income during retirement.  

Talking with clients about these eight tax traps in 2025 can help them make proactive and strategic decisions as they work toward their financial goals. Working together with you and their tax professional can help them navigate complex tax laws and ensure their financial strategies align with their goals. 

Tyler De Haan is director of advanced sales at Sammons Institutional Group.  

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The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed and/or Registered Representatives will be paid a commission on the sale of products distributed by Sammons Financial Network®, LLC. 
 
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