Tax-smart strategies to avoid sticker shock next year

Still recovering from your 2024 tax bill? Here are strategies for making 2025’s taxes less shocking.

2.5-min read

Summary

  • Many taxpayers experienced higher-than-expected 2024 tax bills, particularly retirees whose required minimum distributions (RMDs) increased substantially due to strong 2023 market performance from both stocks and bonds.
  • Qualified charitable distributions (QCDs) offer a tax-efficient strategy for charitable giving, especially for those 73 and older taking RMDs, as these distributions count toward required withdrawals but aren't taxed like regular RMDs.
  • Investment choices can significantly impact tax bills: Consider replacing actively traded mutual funds with exchange-traded funds (ETFs) in taxable accounts to reduce capital gains distributions, and explore municipal bonds for tax-free interest income, particularly if you are in a high tax bracket.

Higher than expected 2024 tax bills

For many TIAA clients, writing that April check to the Internal Revenue Service felt even more painful than usual this year.

“A lot of people found that the tax bill they just paid was higher than they were expecting,” said TIAA tax expert Jonathan Fishburn. Fishburn and Colleen Carcone—both directors on TIAA Wealth Management’s wealth planning strategies team—recently addressed “tax sticker shock” in a TIAA tax-planning webinar. They addressed not only why taxes may have been higher for 2024 but also what clients can do to trim tax bills for 2025.

Highlights are below, edited for length and clarity.

Why were so many tax bills materially higher in 2024 than 2023?

For retirees, the answer may be tied to their required minimum distributions (RMDs) from pretax IRAs, 401(k)s and 403(b)s, Carcone explained. Last year’s RMDs were calculated based on year-end account balances for 2023. As you probably recall, 2023 was a very good year for stocks and bonds (the S&P 500 returned 26% while the Bloomberg US Aggregate Bond returned 6%), whereas 2022 was a very bad year (those same indices were down 18% and 13%, respectively).1

RMDs count as taxable income, so bigger RMDs mean higher taxes. “The market did really well in 2023 compared to 2022,” Carcone said, “so your 2024 RMD would have been higher.”

Markets were up again in 2024. How can retired TIAA clients reduce taxes for 2025?

One solution, according to Carcone, is using qualified charitable distributions (QCDs) for charitable giving. “Yes, it’s quick and easy to write a check or to type that credit card number in when you get a request for a donation—I’m guilty of this myself,” she said. “But being a little bit more strategic can really help you get more bang for your buck from a tax perspective.”

Making charitable gifts via QCDs—rather than out of a checking or savings account—is especially tax efficient for clients who’ve turned age 73 and are required to take RMDs. QCDs count against required distributions from retirement accounts, but they’re not taxable like regular RMDs. Thus, using QCDs for charitable giving can reduce the income tax you owe.

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For TIAA clients with taxable trading accounts, are there any investment changes that could lower taxes for 2025?

Yes, for both equity and fixed income portfolios.

With stocks, one unpleasant byproduct of a bull market can be outsized capital gains taxes. These taxes are especially annoying if you own an actively traded mutual fund, didn’t sell any fund shares during the year, but still owe capital gains taxes on it because the fund manager did a lot of buying and selling and is required to pass along related capital gains to fundholders.

For clients with taxable accounts, Fishburn suggests swapping actively traded mutual funds for exchange-traded funds (ETFs). Most ETFs are index funds, which are passively managed and not actively traded. Because their underlying holdings don’t change much, index funds tend to distribute relatively few capital gains or losses to fundholders. Bottom line: You probably won’t pay significant capital gains taxes from an ETF unless you sell the ETF itself after it has appreciated.

Another type of investment that can help lower taxes is tax-exempt municipal bonds. One lesson from 2024 was that even the most conservative fixed-income investments can impact your tax bill. Given the increase in interest rates over the past five years, savers may have gone from earning very little from bank accounts and money market funds to earning significant amounts of taxable income. For clients in high tax brackets, Carcone suggests talking to your advisor about tax-efficient investing, including using municipal bonds, ETFs or a managed portfolio to minimize taxes.

“With municipal bonds, the interest you earn is free of federal income tax,” said Carcone. “And if the bonds are issued by your home state, they might actually be free of state income tax as well.”

Get personalized advice

For more help with tax planning, please schedule a meeting with a TIAA advisor, who can work with you and your accountant to identify potential opportunities to optimize your taxes for 2025 and beyond.

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1YahooFinance, as measured by the iShares US Aggregate Bond Index Instl. and the State Street S&P 500 Index N, https://finance.yahoo.com/quote/SVSPX/performance/ ; https://finance.yahoo.com/quote/BMOIX/performance/. Accessed May 7, 2025.

The TIAA group of companies does not provide tax or legal advice. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor and/or attorney for specific advice based on the individual’s personal circumstances.

The views expressed in this material may change in response to changing economic and market conditions. Past performance is not indicative of future returns.

This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances, which should be the basis of any investment decision.

Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.

Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser. TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, distributes securities products.

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