Tax Bracket Management

Tax Bracket Management

For high earners, tax bracket management to minimize tax liability is one part of a strategic approach in aiming to preserve and grow wealth.

Curious about how to balance your current and future income to stay within a lower tax bracket over time?

Contact an EP Wealth advisor to explore personalized tax bracket management strategies, including:

• Income deferral
• Accelerating income
• Maximizing deductions
• Strategic retirement contributions

What Is Tax Bracket Management?

Managing your tax brackets may help with maintaining your taxable income within a more desirable tax bracket by strategically timing income and deductions.

Understanding Tax Brackets

With the progressive U.S. federal income tax system, different portions of your income are taxed at different rates. For example, the first portion of your income might be taxed at 10%, the next portion at 12%, and so on, with rates increasing as income thresholds are crossed. 

How Does Tax Bracket Management Work?

There are a number of ways to increase or reduce the amount of income you receive each year to potentially reduce the amount of taxes you owe.

Here are the steps:

Timing Income

First, consider whether you expect to be in a higher or lower income bracket in the future. 

Lower? Defer your income. This could involve delaying a bonus or postponing withdrawals from retirement accounts.

Higher? Accelerate your income. This might mean taking bonuses now, making earlier withdrawals from retirement accounts, or realizing capital gains sooner.

Deductions and Credits

Deductions and credits can impact your taxable income. 

Common deductions that may help you stay within a desired tax bracket include:

• Charitable contributions
• Mortgage interest
• State and local taxes
• Certain property taxes
• Medical expenses 

Tax credits directly reduce your tax bill and can potentially further enhance your tax efficiency.

Retirement Contributions

Contributing to tax-deferred retirement accounts, such as 401(k)s and IRAs, is one way to lower your current taxable income.

Traditional 401(k)s and IRAs

If you're in a high tax bracket and anticipate being in a lower tax bracket during retirement, you might want to invest in a traditional retirement account. By making pre-tax contributions, you may lower your immediate taxable income and could pay less in taxes on your withdrawals. 

Roth 401(k)s and IRAs

On the other hand, if you expect your tax bracket to be higher in retirement, Roth IRAs and Roth 401(k)s allow you to pay taxes upfront, which will allow you to withdraw money tax-free in retirement. Though, keep in mind this depends on whether the timing of the withdrawals is within the Roth IRA and/or Roth 401(k) withdrawal and penalty rules. 

Roth Conversions
Already have a traditional IRA? It’s not too late to change gears. Converting a traditional IRA to a Roth IRA can be a strategic move if you anticipate being in a higher tax bracket in the future. You pay taxes on the converted amount now, potentially at a lower rate, and future qualified withdrawals are tax-free.

Managing Capital Gains

Long-term capital gains are typically taxed at lower rates than ordinary income. By carefully managing the sale of investments, you can potentially benefit from these lower rates and improve your overall tax situation. Harvesting gains in years when your income is lower can be potentially beneficial.

Charitable Giving

Donating appreciated assets, such as stocks, to charity can provide a double benefit: you may be able to avoid paying capital gains tax on the appreciation and you may receive a deduction for the full market value of the donated asset.

Medicare and Social Security Considerations

For retirees, managing income can also impact Medicare premiums and the taxation of Social Security benefits, which are influenced by your income levels.

Managing Your Tax Brackets

By carefully planning the timing of your income, such as deferring bonuses or accelerating deductions, you may have the opportunity to reduce the amount of taxes you owe.

When You Would Want to Use Tax Bracket Management

If you anticipate a substantial increase in income due to a promotion or the sale of a major asset, implementing a tax bracket management strategy might be beneficial. By accelerating income into the current year when your tax rate is lower, you can manage your wealth by minimizing the risk of higher taxes later. 

Should I Use Tax Bracket Management?

Effective tax bracket management requires careful planning and an understanding of the tax code. Working with a financial advisor can help you decide whether a tax bracket management strategy is right for your current situation.

When You Might Not Want to Use Tax Bracket Management

On the other hand, if you expect your income to decrease significantly due to retirement or a career change soon, it could be more beneficial to avoid a tax bracket management strategy that defers income to a later period and instead focus on strategies that use current tax benefits or deductions applicable to your current income level.

Contact EP Wealth for tax planning assistance, including tax bracket management.