The transition into a new year is the perfect time to evaluate your financial health. For Illinois taxpayers, January 2026 serves as a critical junction: you’re preparing to file for the past year while simultaneously setting the stage for the next. While many year-end tax planning strategies for 2025 had to be finalized by December 31, the window for certain high-impact moves is open until the April filing deadline.
The 2025 "Grace Period": What You Can Still Influence
Even after the ball drops on New Year's Eve, the IRS provides a few specific opportunities to lower your 2025 taxable income before you file your return this spring.
- IRA contributions: You have until April 15, 2026, to contribute to a Traditional or Roth IRA. For the 2025 tax year, the limit is $7,000 (plus a $1,000 catch-up for those 50 and older).
- Health Savings Accounts (HSA): If you were covered by a high-deductible health plan in 2025, you can still make contributions up to the 2025 limits ($4,300 for individuals and $8,550 for families) until the filing deadline.
Required Minimum Distributions: Understanding the Rules for 2025
If you turned 73 in 2025 (or were already subject to RMDs), you should have taken your required minimum distribution by December 31, 2025. The SECURE 2.0 Act changed RMD rules significantly, creating different age requirements based on your birth year.
RMD Age Requirements
According to the IRS, RMD starting ages are now:
- Age 73: For individuals born between 1951-1959
- Age 75: For those born in 1960 or later
Penalties for Missing RMDs
If you didn’t take your full RMD by December 31, you’ll face substantial penalties. The excise tax decreased from 50% to 25% of the shortfall starting in 2023. However, if you catch the error quickly and correct it within two years by withdrawing the missed RMD and filing an amended return, the penalty may be further reduced to 10%.
How can you report missed RMDs? You’ll need to use IRS Form 5329, Additional Taxes on Qualified Plans. The IRS may waive the penalty if you can demonstrate that the shortfall resulted from a reasonable error, and you're taking steps to remedy it. When filing Form 5329, be sure to attach a detailed explanation letter.
Important RMD Changes
Starting January 1, 2024, Roth 401(k) accounts are no longer subject to RMDs during the account owner's lifetime, aligning with Roth IRA rules. This change provides significant tax planning flexibility for retirees with substantial Roth 401(k) balances.
Qualified Charitable Distributions (QCDs)
For taxpayers ages 70½ or older in 2025, QCDs offered a tax-efficient strategy to satisfy RMDs while supporting charitable causes. You could transfer up to $108,000 directly from your IRA to qualified charities. These distributions count toward your RMD while being excluded from taxable income, potentially reducing Medicare premiums and taxes on Social Security benefits.
Tax-Loss Harvesting: Turning Market Volatility into Tax Savings
Strategic investment management through tax-loss harvesting can significantly reduce your tax liability. This involves selling securities that declined in value to realize losses that offset capital gains.
How Tax-Loss Harvesting Works
Capital losses offset capital gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 of excess losses against ordinary income annually ($1,500 for married filing separately). Any remaining losses carry forward indefinitely to future tax years.
Example: You realized $35,000 in capital gains during 2025 from selling appreciated stocks. You also hold mutual funds showing $22,000 in unrealized losses. Selling those losing positions before December 31 would have reduced your net taxable gains to $13,000, saving approximately $3,300 to $4,400 in federal capital gains taxes (depending on your tax bracket).
The Wash Sale Rule
The wash sale rule prohibits claiming a tax loss if you repurchase the "same or substantially identical" security within 30 days before or after the sale. This rule is designed to prevent taxpayers from selling securities solely for tax benefits while maintaining the same market exposure.
To avoid wash sale violations while capturing losses:
- Wait 31 days before repurchasing the same security.
- Purchase a similar but not identical investment (such as a different S&P 500 index fund from another provider).
- Invest in a broader or different sector fund.
Report capital gains and losses using IRS Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D.
Advanced Strategy: Combining Tax-Loss Harvesting with Charitable Giving
Sophisticated investors coordinate tax-loss harvesting with charitable donations to achieve maximum tax efficiency. Here's how:
- Sell depreciated securities at a loss to offset gains.
- Donate appreciated securities to charity instead of cash.
- Use cash from the loss sale to rebalance your portfolio.
This approach captures tax losses while avoiding capital gains tax on charitable contributions, increasing the amount available for charity by up to 20%.
Strategic Charitable Giving Techniques
Charitable contributions provide tax deductions while supporting causes you value. However, keep in mind that strategic timing and asset selection dramatically increase tax benefits.
Bunching Strategy for Illinois Taxpayers
With the 2025 standard deduction at $29,200 for married couples filing jointly and $14,600 for single filers, many taxpayers don't benefit from itemizing. "Bunching" solves this problem by concentrating multiple years of donations into one tax year.
How it works: Instead of donating $12,000 annually to charity, contribute $36,000 to a donor-advised fund (DAF) in one year. You receive an immediate deduction for the full amount (assuming other itemized deductions push you above the standard deduction threshold) while distributing grants to charities over three years. In alternating years, take the standard deduction to maximize total deductions over multiple years.
Donating Appreciated Securities
Donating long-term appreciated stocks, bonds, or mutual funds provides two significant benefits:
- Deduct the full fair market value (up to 30% of adjusted gross income annually)
- Avoid paying capital gains tax on the appreciation
Example: You purchased stock for $15,000 that's now worth $65,000. Donating the shares directly to charity allows you to claim a $65,000 charitable deduction while avoiding $7,500 to $10,000 in capital gains taxes. This increases the amount available for charity by up to 20% compared to selling securities and donating after-tax proceeds.
Business Tax Strategies for 2026
Business owners, including self-employed individuals, have unique opportunities to manage tax liability through the strategic timing of income and expenses.
Section 179 Deduction
The Section 179 deduction allows businesses to immediately expense up to $1,220,000 in qualified equipment purchases placed in service during the tax year, rather than depreciating costs over multiple years. When total equipment purchases exceed $3,050,000, the deduction phases out.
Qualified property includes:
- Machinery and equipment
- Office furniture and fixtures
- Computer software
- Vehicles that are used more than 50% for business
Bonus Depreciation
Bonus depreciation for qualified property placed in service in 2025 was 40%, down from 60% in 2024. For 2026, bonus depreciation drops to 20%. This phase-down creates urgency for businesses considering purchasing equipment.
Illinois Note: Illinois has different bonus depreciation rules than federal law. Illinois taxpayers must make adjustments when filing Form IL-1040 to account for these differences. We recommend working with a tax professional to ensure proper state adjustments.
Timing Income and Expenses
Cash-basis businesses can manage taxable income by strategically timing:
Accelerate Deductible Expenses:
- Office supplies and equipment
- Insurance premiums
- Professional association dues
- Software subscriptions
- Maintenance contracts
- Prepaid expenses for early 2026
Defer Income to 2026:
- Delay year-end invoicing until late December (payment arrives in January)
- Postpone bonuses until January
- Defer contract completions to early 2026
These strategies are the most effective when you expect to be in the same or lower tax bracket in 2026.
Estate and Gift Tax Planning: Take Action Before Exemption Changes
This year, the estate and gift tax landscape faces significant changes. The current estate tax exemption of $13.61 million per individual (2025) is scheduled to drop approximately in half when the Tax Cuts and Jobs Act provisions expire at the end of 2025.
What This Means for High-Net-Worth Individuals
Without congressional action, the exemption will fall to approximately $7 million per person (adjusted for inflation) starting January 1, 2026. This is a massive reduction in the amount you can transfer tax-free to heirs.
Annual Gift Exclusions: For 2025, you could make annual exclusion gifts of up to $18,000 per recipient without impacting your lifetime exemption. For 2026, this amount increases to $19,000. Married couples can combine their exclusions to gift up to $38,000 per recipient annually.
Strategic Actions to Consider:
- Make large gifts before the exemption drops
- Establish irrevocable trusts
- Consider spousal lifetime access trusts (SLATs)
- Implement grantor retained annuity trusts (GRATs)
- Fund 529 plans for grandchildren
2026 Tax Brackets and Contribution Limits
At Lewis.cpa, we want to help you avoid the last-minute rush next December. Ideally, you’ll update your payroll deductions now to reflect the new 2026 thresholds. Staying ahead of these numbers is one of the simplest and most effective ways to manage your long-term tax liability.
Special Note: SECURE 2.0 introduced enhanced catch-up contributions for employees ages 60-63, who can contribute an additional $11,250 to 401(k) plans (instead of the standard $8,000) if their plan allows, for a total of $35,750 in 2026.
Proactive Strategies to Take into the 2026 Tax Year
The most effective year-end tax planning strategies start in January. Don’t wait until December, as this limits your ability to spread out costs and maximize compound growth.
Strategic Charitable Giving in Illinois
If you didn't meet the standard deduction threshold in 2025, consider the "bunching" method for 2026. By concentrating several years of planned donations into a single calendar year through a Donor-Advised Fund (DAF), you may surpass the deduction floor and significantly lower your tax bill.
Illinois-Specific Education Savings
For Illinois residents, contributions to Bright Start or Bright Directions 529 plans offer a valuable state tax deduction. For 2026, you can deduct up to $10,000 ($20,000 for married couples filing jointly) from your Illinois taxable income. When you start these contributions early in the year, you’ll have more time for the funds to grow tax-free.
K-12 Education Expense Credit: Illinois offers a tax credit of 25% of qualified K-12 educational expenses exceeding $250, up to a maximum credit of $750 per family. This credit is available to taxpayers with a federal adjusted gross income that doesn’t exceed $250,000 ($500,000 for married couples filing jointly).
Reviewing Your Withholding
Life events such as marriage, a new home, or starting a business in Illinois will change your tax profile. The start of the year is a great time to adjust your W-4 or estimated tax payments. This ensures you aren't providing the government with an interest-free loan or facing an unexpected penalty next April.
If you need additional guidance, use the IRS Tax Withholding Estimator to calculate appropriate withholding levels based on your updated circumstances.
Quarterly Estimated Taxes for 2026
Self-employed individuals, business owners, and those with substantial investment income usually must make quarterly estimated tax payments. Missing these deadlines or underpaying can result in penalties.
2026 Estimated Tax Payment Deadlines
- April 15, 2026: First quarter payment.
- June 16, 2026: Second-quarter payment.
- September 15, 2026: Third-quarter payment.
- January 15, 2027: Fourth quarter payment.
Safe Harbor Rules
To avoid underpayment penalties, you must pay at least:
- 90% of your 2026 tax liability, or
- 100% of your 2025 tax liability (110% if your 2025 AGI exceeded $150,000)
Calculate estimated taxes using IRS Form 1040-ES, Estimated Tax for Individuals. For Illinois, use Form IL-1040-ES to calculate state estimated tax payments.
Roth Conversion Strategies
Converting traditional IRA funds to a Roth IRA can provide long-term tax benefits, especially if your income is lower than usual or tax rates are relatively favorable.
Benefits of Roth Conversions
- Tax-free growth and withdrawals in retirement
- No RMDs during your lifetime
- Tax-free inheritance for beneficiaries
- Protection against future tax rate increases
Strategic Timing
Roth conversions are ideal when:
- You're in a lower-than-usual tax bracket
- You have tax losses to offset conversion income
- You're between retirement and RMD age
- You expect to be in a higher bracket in the future
Important: You'll owe income tax on the converted amount in the year of conversion. Use IRS Form 8606, Nondeductible IRAs, to report conversions.
Illinois State Tax Considerations
Illinois maintains a flat income tax rate of 4.95%, but several state-specific deductions and credits can reduce your Illinois tax liability.
Municipal Bond Strategies
Interest from bonds issued by the state of Illinois or local governments is exempt from Illinois income tax. For Illinois residents in higher federal tax brackets, these bonds can provide attractive tax-equivalent yields compared to taxable bonds.
Tax-Equivalent Yield Formula: Tax-Equivalent Yield = Municipal Bond Yield Ă· (1 - Tax Rate)
For a taxpayer in the 35% federal bracket holding an Illinois municipal bond yielding 3.5%: Federal Tax-Equivalent Yield = 3.5% Ă· (1 - 0.35) = 5.38%
Since Illinois municipal bonds are also state tax-exempt for Illinois residents, the combined tax benefit can be substantial.
Property Tax Considerations
Illinois property taxes are some of the nation’s highest. With the federal SALT deduction capped at $10,000, Illinois homeowners must plan property tax payments carefully.
If you're under the $10,000 SALT cap, consider:
- Paying January property tax installments in December to maximize current-year deductions.
- Bunching property tax payments to exceed the standard deduction threshold.
- Appealing assessments to reduce future tax liability.
Investment Strategy Review for 2026
The new year is an ideal time to review and rebalance your investment portfolio, taking into account tax implications.
Asset Location Optimization
As different types of investments are taxed differently, asset location is a key tax planning strategy:
Tax-Deferred Accounts (Traditional IRA, 401(k)):
- Bonds and fixed-income investments
- Real estate investment trusts (REITs)
- High-turnover actively managed funds
Roth Accounts (Roth IRA, Roth 401(k)):
- High-growth stocks
- Investments with high expected returns
- Volatile assets with significant appreciation potential
Taxable Accounts:
- Tax-efficient index funds
- Long-term buy-and-hold stocks
- Municipal bonds (for Illinois residents)
Capital Gains Planning
Review your portfolio's unrealized gains and losses. If you anticipate being in a lower tax bracket in 2026, consider recognizing gains while rates are favorable. Conversely, if you expect a higher income, defer gains to future years when possible.
Long-term capital gains rates for 2026:
- 0% for taxable income up to $48,350 (single) / $96,700 (married filing jointly)
- 15% for income above these thresholds up to $533,400 (single) / $600,050 (married filing jointly)
- 20% for income exceeding these amounts
Professional Tax Planning Starts with Lewis.cpa
Tax laws are in a constant state of flux, especially with the potential expiration of major federal tax provisions at the end of 2025. This makes early 2026 planning more important than ever. Now is the best time to take action to reduce the number of surprises at tax time and ensure smarter financial decisions.
At Lewis.cpa, we believe that tax management should be a year-round conversation, not a one-time headache. We have 39 years of experience and have served 4,000+ clients and counting. Contact us to apply disciplined strategies that protect your wealth and support your financial goals.
