4 Important Tax Planning Tips
If you recently left your federal government job, you might be wondering what that means for your taxes in 2025. There might be some unique opportunities and potential pitfalls to be aware of. Whether you’re moving into a new job, starting a business or figuring out what’s next, here are four key tax planning tips to keep in mind.
#1 – Decide what to do with your employer-sponsored retirement plan.
If you have money in the Federal Employees Retirement System (FERS), you’ll need to consider what to do with those assets. You may have three options:
- Take the money as a lump sum – You can withdraw your retirement contributions as a lump sum, but it’s important to note that a portion of your distribution may be taxed at ordinary income tax rates. If you go this route, you’ll need to fill out the Application for Refund of Retirement Deductions, located here.
- Wait for monthly retirement benefits – If you’re at least age 62 and have five or more years of service, you might qualify to start receiving monthly retirement checks when you officially retire. There are some rules around this, so it’s a good idea to check with a financial professional or visit the U.S. Office of Personnel Management website.
- Roll it over – You can move your retirement savings into an IRA or another employer’s plan without paying taxes as long as the transfer is done correctly. A direct rollover can help you avoid immediate taxes while keeping your money invested for the future. Your wealth manager can help ensure the rollover is completed properly to help you avoid any potential tax liabilities.
#2 – Don’t miss out on tax credits and deductions.
If you’re switching careers, starting a business or going back to school, there may be tax breaks that can save you money. Here are a few to consider:
- Child and dependent care credit – If you’re job hunting and paying for childcare (or care for a dependent), you might be able to claim some of those costs as a tax credit. You’ll need IRS Form W-10 from your care provider and must file IRS Form 2441 with your return.
- Lifetime learning credit – If you take college, graduate or vocational courses, you could get back 20% of up to $10,000 in tuition and fees (up to a $2,000 credit). Income limits apply, so if you make more than $80,000 ($160,000 if filing jointly), this credit will be reduced or, eventually, eliminated.
- American opportunity tax credit (AOTC) – This is a credit of up to $2,500 for qualified undergraduate education expenses paid within the year that can be used for the first four years of school. This credit applies to money spent on tuition, school fees, books and supplies, but it doesn’t cover living expenses or transportation costs.
- Home office deduction – If you decide to start a business out of your home, you may be eligible for a home office deduction. There are two approved methods for calculating this deduction:
- Actual expense – This method allows you to calculate the percentage of your home that comprises your home office and add in other costs based on that percentage. For example, if your office takes up 5% of your home, you can deduct 5% of your mortgage, mortgage interest and utilities. (This method requires you to keep meticulous records of your expenses.)
- Simplified – This method allows you to claim $5 per square foot, up to 300 square feet (a maximum of $1,500).
#3 – Consider a Roth conversion.
If your 2025 income is lower than normal due to leaving your employment, it may make sense to use this as an opportunity to complete a Roth conversion (if doing so aligns with your overall planning strategy).
A Roth conversion is the process of converting a traditional IRA (pre-tax dollars) to a Roth IRA (after-tax dollars). Completing a Roth conversion requires you to pay ordinary income taxes on the traditional IRA dollars converted during the year the conversion takes place. However, the benefit is that you can then withdraw those assets in retirement without paying federal income tax (assuming you’ve reached age 59 ½ and the assets have been held in the account for five years).
#4 – Report any self-employment income.
If you’re freelancing, consulting or running your own business, you’ll need to report all income to the IRS. The self-employment tax rate is 15.3%, which includes a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. In 2025, only the first $176,000 of earnings is subject to Social Security tax.
Be aware that self-employment tax isn’t the same as income tax. IRS Schedule C is used to calculate your net self-employment earnings, and IRS Schedule SE calculates the amount of self-employment tax you owe.
To avoid incurring late-payment penalties, you may need to make quarterly estimated tax payments throughout the year. Your wealth manager and tax advisor can help you determine the best approach.
