How to Plan for Next Year’s Tax Brackets: Year-End Moves to Consider

As the year draws to a close, taxpayers have a golden opportunity to assess their financial picture and prepare for the upcoming year’s tax implications. Tax brackets, which adjust annually to reflect inflation, play a critical role in shaping your overall tax liability. Taking proactive steps now can help you minimize taxes, optimize income, and enhance your financial health.

Understanding Tax Brackets

Tax brackets divide taxable income into ranges, each with a corresponding tax rate. For example, in the U.S., the federal tax system uses a progressive structure, meaning higher income is taxed at higher rates. Adjustments to these brackets, typically announced in the fourth quarter, reflect inflationary pressures and impact the amount of income taxed at each level.

Preparing for these shifts is not just about knowing where you might land—it’s about making thoughtful decisions now to influence your taxable income.

Key Moves to Optimize Your Tax Position

One powerful strategy involves managing when income is recognized. For individuals nearing the threshold of a higher bracket, deferring income into the next year can prevent a portion from being taxed at a higher rate. This is especially relevant for business owners, freelancers, or anyone who can control the timing of payments. Alternatively, if this year’s income is unusually low, accelerating income into the current year may be beneficial.

Another critical step is maximizing contributions to tax-advantaged accounts, such as 401(k)s, IRAs, and HSAs. These contributions not only lower taxable income but also allow for growth without immediate tax consequences. If you’re over 50, additional "catch-up" contributions provide even more opportunities to reduce your taxable income.

Strategic Tax-Loss Harvesting

Investors can leverage tax-loss harvesting to offset capital gains. Selling underperforming investments at a loss not only balances gains but also reduces taxable income. This strategy can be particularly effective during volatile market periods when asset prices fluctuate significantly. However, it’s essential to be aware of the wash-sale rule, which restricts repurchasing the same or similar securities within 30 days.

Considering a Roth Conversion

For those anticipating higher future tax rates, a Roth IRA conversion is worth exploring. By converting some or all of a traditional IRA into a Roth account now, you can lock in today’s tax rate and enjoy tax-free growth and withdrawals later. While this triggers taxable income in the year of conversion, it can be a strategic move when income levels are temporarily low.

Make the Most of Deductions and Credits

The end of the year is also a time to review deductions and credits. Charitable giving, medical expenses, and energy-efficient home improvements can all reduce taxable income. For taxpayers nearing the standard deduction threshold, bunching deductible expenses into a single year can maximize benefits.

Additionally, with higher standard deductions now in place, some taxpayers may find it more advantageous to simplify their tax strategy rather than itemizing deductions. Understanding where you stand is key to making the right choice.

Take Action Before December 31

Tax planning doesn’t have to be overwhelming, but it does require attention to detail and timely action. Meeting with a financial advisor or tax professional before year-end can help you identify which strategies best suit your situation. By taking the right steps now, you can navigate tax brackets effectively, minimize liabilities, and set yourself up for financial success in the coming year.

Proactive planning is the cornerstone of good financial health. Don’t let the year slip away without taking stock of your tax strategy—it’s a decision that can pay dividends well into the future.