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.
Pick your bracket
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.
2025 federal tax rates and brackets for ordinary income and long-term capital gains
Single filer for 2025
| Taxable income | Ordinary income & short-term capital gains tax rates |
|---|---|
| $626,351 or more | 37% |
| $250,526 to $626,350 | 35% |
| $197,301 to $250,525 | 32% |
| $103,351 to $197,300 | 24% |
| $48,476 to $103,350 | 22% |
| $11,926 to $48,475 | 12% |
| $0 to $11,925 | 10% |
Source
IRS for tax year 2025. Note: First $15,000 of income is covered by the standard deduction.
| Taxable income | Long-term capital gains tax rates |
|---|---|
| $533,401 and up | 23.8% (20%+3.8%*) |
| $200,001-$533,400 | 18.8% (15%+3.8%*) |
| $48,351-$200,000 | 15% |
| $0-$48,350 | 0% |
Source
IRS for tax year 2025. *Net investment income tax is 3.8% based on modified adjusted gross income. Note: First $15,000 of income is covered by the standard deduction.
Joint filers for 2025
| Taxable income | Ordinary income & short-term capital gains tax rates |
|---|---|
| $751,601 and up | 37% |
| $501,051 to $751,600 | 35% |
| $394,601 to $501,050 | 32% |
| $206,701 to $394,600 | 24% |
| $96,951 to $206,700 | 22% |
| $23,851 to $96,950 | 12% |
| $0 to $23,850 | 10% |
Source
IRS for tax year 2025. Note: First $30,000 of income is covered by the standard deduction.
| Taxable income | Long-term capital gains rates |
|---|---|
| $600,051 and up | 23.8% (20%+3.8%*) |
| $250,001-$600,050 | 18.8% (15%+3.8%*) |
| $96,701-$250,000 | 15% |
| $0-$96,700 | 0% |
Source
IRS for tax year 2025. *Net investment income tax is 3.8% based on modified adjusted gross income. Note: First $30,000 of income is covered by the standard deduction.
Keep in mind that the standard deduction—or itemized deduction if it is larger—renders the first portion of your income non-taxable. Once your deductions have been used up, additional income becomes taxable.
First, any ordinary income—which includes your net short-term capital gains—fills up each tax bracket. A portion will be taxed at 10%, then at 12%, and so on until all your taxable ordinary income is accounted for. Next, taxes are applied to your long-term capital gains, with the tax rate you start at based on where your ordinary income left off.
Here's an example: If you were a single filler with $100,000 of ordinary income and $20,000 of long-term capital gains, your taxes would be calculated by first reducing your ordinary income by $15,000 (the standard deduction in 2025) to $85,000. At that point, your ordinary income begins to fill up the tax brackets, first the 10% bracket, then 12%, and finally the 22%. Next, your long-term capital gains would start to be taxed where your ordinary income left off. That means, you would skip the 0% long-term capital gains bracket and go directly to the 15% bracket.
Managing your income
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.
Reducing taxable income to limit exposure to higher brackets
- Increase savings: If you haven't maxed out any tax-deferred retirement accounts—like a 401(k)—consider boosting your contributions. You can also set aside any windfalls from a bonus or pay rise. For 2025, you can contribute up to $23,500 to a 401(k).
- Contribute to a Health Savings Account (if eligible): If you are covered by a high-deductible health plan, you can sock away triple-tax-free money for future health care costs in an HSA. Contributions to an HSA may be tax-deductible. Interest, dividends, and capital gains on your investments accumulate tax-free. You pay no tax on withdrawals for qualified medical expenses.
- Increase charitable giving: Those who are charitably inclined can increase their giving above the value of the standard deduction.
- Tax-loss harvesting: Tax-loss harvesting generally works like this: You sell an investment that's underperforming and has lost money. Then, you use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income. Finally, you reinvest the money from the sale in a different security that meets your investment needs and asset-allocation strategy. When conducting these types of transactions, you should also be aware of the wash-sale rule, which states that if you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.
Increasing taxable income to fill up a tax bracket
- Roth conversions: When you convert some of the savings from a tax deferred account to a Roth you end up paying taxes but assets in a Roth IRA accumulate tax-free and you pay no taxes on qualified distributions. Also, you'll never have to take required minimum distributions (RMDs) from a Roth IRA, unlike with traditional IRAs and 401(k) accounts. And Roth assets can pass tax-free to heirs.
- Qualified distributions: If you're retired but haven't started RMDs yet, you could consider tapping your tax-deferred retirement accounts. Particularly, if you have significant tax-deferred savings and suspect RMDs from these accounts could push you into a higher tax bracket later in retirement, you may want to consider withdrawing from your tax-deferred accounts once you reach age 59½.
- Tax-gain harvesting: The process of harvesting gains is pretty straightforward: You just sell the investment when you think it'll have the least impact on your taxes. If you'd like to keep the investment, you can even turn around and buy it again, since the wash sale rules don't apply if every share is sold for a gain. Doing so effectively resets the cost basis on which your future tax liability will be calculated.
Examples of tax-bracket management
Here are a couple hypothetical examples to show how tax-bracket management could play out.
Reducing taxable income
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.
Reducing taxable income to fall out of a tax bracket
Source: Schwab Center for Financial Research. For illustration purposes only. Reflective of 2025 tax rates.
Increasing taxable income to fill up a 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).
Taking advantage of the 0% long term capital gains tax bracket
Source: Schwab Center for Financial Research. For illustration purposes only. The hypothetical example assumes that the capital gain will remain stable over time; however, in real-life situations the capital gain may change, potentially affecting the ability to sell at a gain in the future. Reflective of 2025 federal tax rates. Realizing capital gains may impact the taxation of Social Security benefits or affect other deductions, credits, or benefits.
Additional factors to consider
- 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.
Timing
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.
