Using Tax Brackets to Manage Your Taxable Income

Adjusting your income according to where each dollar will fall within the different tax brackets is a tax-planning strategy that could potentially lower your total lifetime tax burden.

The basic idea is to treat the brackets like thresholds and then adjust your income around them. Sometimes this means filling your final tax bracket up with just enough income to avoid spilling over into the next bracket. Or, if you're just over the line, then you can look for ways to reduce your income to avoid paying taxes at the higher rate. Almost anyone can do it, regardless of their current tax bracket. 

Here's how to make your own tax bracket-management strategy.

The first step is to work with a tax professional to estimate your income for the year. Mid-November can be a good time to do this, as by that point in the year you should have a pretty good idea of how much money you'll be bringing in. 

With this information, you can calculate two marginal tax brackets: your ordinary income tax bracket and your long-term capital gains tax bracket.

For federal taxes, ordinary income generally includes wages and income from a business. There are seven ordinary income tax brackets ranging from 10% to 37%, but not all ordinary income ends up being taxable once you factor in deductions.

Long-term capital gains generally come from the sale of appreciated investments or other assets held for over a year. There are four long-term capital gains brackets ranging from 0% to 23.8% (20% plus the 3.8% net investment income tax). Investments held less than a year and sold for a gain are considered short-term capital gains and are taxed as ordinary income. 

The tables below offer more detail. 

Once you know your income and tax rates, you can look for opportunities to adjust your income, using the brackets as thresholds. 

If your income is just above a tax bracket threshold, you could seek opportunities to lower your taxable income. For example, you could contribute more to a tax-deferred retirement account or seek out tax-loss harvesting opportunities. 

On the other hand, if your taxable income was just below a tax bracket threshold but you expected it to be higher in future year, you could boost your taxable income for the current year up to the top of the bracket by executing a Roth conversion or harvesting some taxable capital gains. That could help you avoid having more of your future income exposed to higher tax brackets, potentially reducing your taxes over the long term. And if you can realize capital gains at the 0% tax rate without going over the line, so much the better. 

Here are a couple hypothetical examples to show how tax-bracket management could play out. 

Cutting income to avoid higher tax rates in the current year is perhaps the more intuitive move. 

Let's say Ben, a single filer, is on track to make $242,000 in 2025. After factoring in the $15,000 standard deduction and a $19,360 contribution to a pre-tax 401(k), Ben's taxable ordinary income is $207,640 for the year ($242,000 minus $19,360 minus $15,000). At that level of income, $10,340 of taxable income would fall into the 32% ordinary income tax bracket (which kicks in after $197,300 of income). Here are some ways Ben could reduce his income: 

• Boost 401(k) contribution. The limit for 2025 is $23,500 for those under 50, so Ben contribute an additional $4,140 his 401(k). Plus…
• Maximize contributions to an HSA. The limit for 2025 is $4,300, so making the max contribution would reduce Ben's income even further (assuming he is eligible). Plus… 
• Tax loss harvesting. Up to $3,000 of net capital losses can be used to offset ordinary income, so if Ben harvesting at least $1,900 in losses he would wipe out the income that falls into the 32% tax bracket. 

Boosting your taxable income may not sound like a way to lower taxes over time, but the goal is to book as much income as possible at lower rates today, so you can avoid having to pay higher rates in the future. 

Let's say Susan and Bob are a married couple filing jointly and they expect to have $95,000 of total ordinary income in 2025. After factoring in the $30,000 standard deduction, that means $65,000 of taxable income. They also have investments with significant long-term capital gains, which they would like to sell to build their cash savings. 

Their current taxable income of $65,000 puts them in the 0% long-term capital gains tax bracket. By harvesting some taxable gains, they could potentially sell investments held for more than a year and realize up to $31,700 of gains without incurring any additional taxes ($96,700 limit for the 0% long term capital gains tax bracket, minus taxable income of $65,000).

• Realizing additional income can be complex, which is why we recommend working with a tax advisor (preferably a CPA or enrolled agent) who can perform calculations to help target specific dollar amounts. 
• Boosting taxable income can increase the share of Social Security income that is taxed, if your "combined income" (equal to adjusted gross income plus nontaxable interest plus one-half of Social Security benefits) is not already above $34,000 for an individual or $44,000 for a joint return in 2025. It could also result in higher Medicare premiums.
• Boosting taxable income can affect certain deductions, credits, or other benefits. Realizing additional income could lower certain tax deductions or credits. Consider working with a tax expert in addition to a wealth manager to help ensure you understand the potential tax implications of any additional income you realize. 

Don't fret if you overshoot your tax bracket target by a small margin. Any income that crosses into the next higher tax bracket will result in only a marginal increase in taxes and won't impact the tax rate on income below that bracket. For example, if $100 dollars goes into the 32% tax bracket, only the $100 will be taxed at that higher rate, not the rest of your income. 

As mentioned above, the last few months of the year can be a good time for tax bracket-management strategies. However, be sure to allow enough time to put any tax management strategies—such as making additional pretax retirement contributions or managing investments—to work before year-end.

It also bears repeating: Consider working with a wealth advisor as well as a tax expert to explore different combinations of tax planning techniques to smooth and manage taxes over time.