Jun 4, 2026
How to Use Tax Bracket Management to Your Advantage
Imagine selling a business in 2026, receiving a large inheritance, or getting a major bonus and realizing in April that the additional income pushed more of your money into higher tax brackets than expected. The event may be a blessing, but the tax bill can still be a shock.
Tax bracket management is the process of shifting income, deductions, gains, and contributions across the current year and future years to minimize lifetime tax liability. This article focuses on U.S. federal taxes for the 2025–2026 tax years, including specific tax brackets and tax rates.
At Third Act Retirement Planning, we help families steward sudden wealth through fee-only, fiduciary planning grounded in biblical wisdom. The goal is not just to lower taxes this year, but to make legal, thoughtful decisions that support retirement, generosity, and legacy.
How Federal Tax Brackets Work (and Why Higher Tax Brackets Don’t Ruin You)
The U.S. federal income tax system is progressive with higher rates on higher income. Ordinary income tax brackets range from 10% to 37%, and federal tax brackets are adjusted for inflation each year by the internal revenue service.
Here’s the key point: a higher tax bracket does not apply to every dollar you earn. It applies only to the dollars that fall inside that bracket.
For example, in 2025, a single filer pays:
10% on the first layer of taxable income
12% on the next layer
22%, 24%, 32%, 35%, and 37% as income rises
If a single filer has $200,000 of taxable income in 2025, only the amount above $197,300 falls into the 32% bracket. The earlier dollars are still taxed at lower tax rates. That is why your effective rate is usually much lower than your marginal rate.
Ordinary income includes wages, business income, interest, short-term gains, and many withdrawals from retirement accounts. Investment income has distinct tax brackets, which can be managed alongside ordinary income.
Tax-bracket creep occurs when income increases push taxpayers into higher brackets. Tax-bracket creep can result in higher effective tax rates, especially in high income years. State taxes can stack on top of federal taxes, so someone in Georgia, California, New York, or another state should estimate both.
You can review current federal brackets on the IRS federal income tax rates page.
Step 1: Pick Your Bracket Targets for This Tax Year
Do this by mid-November:
Estimate wages, business income, bonuses, interest, dividends, and withdrawals, then compare that projection with the previous year when estimating this year’s bracket.
Add expected realized gains from stock, mutual funds, real estate, or business assets.
Confirm your filing status, especially for married couples.
Subtract the standard deduction or expected itemized deductions.
Identify your ordinary income bracket, capital gains bracket, and exposure to net investment income tax.
Your goal is to manage your adjusted gross income so the final dollar is taxed at the lowest reasonable marginal rate, while also deciding when to boost taxable income up to a chosen bracket ceiling if that improves long-term tax efficiency. Manage your Adjusted Gross Income to keep final dollars taxed at the lowest marginal rates.
Common cliff levels matter. For 2025, the 0% capital gains bracket ends at $48,350 for single filers and $96,700 for married filing jointly. The 3.8% net investment income tax begins when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.
If you expect a liquidity event, inheritance-related sale, legal settlement, NIL income, or business exit, meet with a tax advisor in October or early November. A CPA and a fiduciary advisor like Third Act Retirement Planning can help validate your estimate before December 31 closes the planning window.
Managing Your Income: When to Reduce vs. When to Increase Taxable Income
Tax bracket management is not always about reducing income. Sometimes the best strategy is to intentionally create taxable income in a lower tax bracket.
In high income years, you may want to reduce taxable income using pre tax accounts such as a 401(k), 403(b), traditional ira, or health savings account. Contributions, deductions, and charitable giving can move income out of higher brackets into lower ones.
In low-income years, the opposite can be true. Roth conversions are beneficial if executed during low-income years to lock in lower tax rates. You might also harvest capital gains, take strategic withdrawals, or convert part of a traditional ira to a roth ira before required minimum distributions begin.
For example, a newly retired couple in the 12% bracket may convert part of an IRA now to avoid future withdrawals being taxed at 24% or 32%. That can lower taxes over a lifetime even if it increases tax liability in the current year.
The best tax strategies are written into a multi-year plan. December guesses are rarely as effective as a coordinated strategy.
Lever 1: Contribute Aggressively to Retirement Plans and Other Pre-Tax Accounts
Pre tax accounts reduce taxable income in higher tax brackets. Contributions to retirement accounts reduce taxable income dollar-for-dollar, and contributing to a 401(k) can reduce taxable income dollar-for-dollar.
For 2026, you can contribute up to $24,500 to a 401(k). Catch-up contributions for those over 50 are $8,000 in 2026. IRA contribution limits are $7,500 for 2026, subject to eligibility and deduction rules. In 2025, the 401(k), 403(b), and government 457(b) employee deferral limit is $23,500, with a $7,500 catch-up for age 50 and older.
This is especially powerful when a bonus, stock sale, or business event pushes you into the 32% or 35% bracket. Every eligible dollar you contribute may deduct income from the higher tax bracket first.
A health savings account can also help. Utilize Health Savings Accounts for a triple tax advantage: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. You can contribute $4,300 to an HSA in 2025 if you have self-only coverage under a high deductible health plan, or $8,550 for family coverage.
At Third Act Retirement Planning, we do not view contributions as isolated tax moves. We coordinate retirement plans, savings, future withdrawals, and retirement income projections so today’s tax savings do not create avoidable problems later.
Lever 2: Control Capital Gains and Use Tax Loss Harvesting Wisely
Large capital gains in one tax year can push overall income into higher tax brackets and trigger the 3.8% net investment income tax. According to the IRS NIIT guidance, the surtax applies to certain investment income when income exceeds the threshold.
One strategy is spreading sales across multiple years. If you plan to sell stock, mutual funds, real estate, or concentrated business assets, the timing can matter as much as the sale price. Review cost basis before you sell, because cost basis determines how much gain is taxable.
Tax loss harvesting offsets realized gains with losses. Tax-loss harvesting can offset realized gains and reduce taxes. You can also offset up to $3,000 of ordinary income with losses each tax year, with excess losses generally carried forward.
Be careful with the wash-sale rule. If you sell an investment at a loss and buy a substantially identical investment too soon, the loss may be disallowed. Many investors replace sold funds with similar, but not substantially identical, holdings to stay invested.
In a year with sudden wealth, tax loss harvesting can be a valuable way to offset realized gains, reduce taxes, and manage exposure to higher tax rates.
Lever 3: Time Income, Deductions, and Charitable Giving Around High Income Years
Business owners, consultants, and self-employed taxpayers often have some control over timing. You may defer income to avoid moving into a higher tax bracket during the year-end, or accelerate deductible expenses into a high income year after comparing the current year with the previous year.
Examples include:
Paying eligible business expenses before December 31
Deferring invoices when you expect lower brackets next year
Bunching charitable contributions into one tax year
Prepaying certain property taxes or mortgage interest when allowed
Bunch deductions to maximize your tax benefits in a given year. Bunching charitable contributions can maximize tax benefits, especially when itemized deductions exceed the standard deduction. Charitable contributions can reduce taxable income if itemized.
A donor-advised fund can help you give several years of planned charitable giving in one high-income year, then distribute funds to ministries and charities over time. Donating appreciated assets avoids capital gains tax and can support generosity without selling the assets first.
Qualified charitable distributions can offset required minimum distributions. In 2026, QCDs can be up to $111,000 per individual. Qualified charitable distributions can offset required minimum distributions while supporting churches, ministries, and nonprofits.
For many Third Act clients, this is where tax planning and biblical stewardship meet. The aim is not simply to spend less on taxes, but to direct money toward family, mission, and legacy with wisdom.
Practical Examples of Tax Bracket Management in Action
Here are two simplified examples using 2025 concepts. These are illustrations only, not individualized tax advice.
Reducing Taxable Income to Avoid or Lessen Exposure to a Higher Tax Bracket
Ben is single. In 2025, his projected taxable income before final planning is $232,000. The 24% bracket for a single filer ends at $197,300, so $34,700 of Ben’s income falls into the 32% bracket.
Before planning, Ben’s estimated federal tax liability on ordinary income is about $51,303.
Ben then takes three steps:
Adds $15,000 to his traditional 401(k)
Contributes $4,300 to an HSA
Uses $20,000 of itemized charitable tax deductions through a donor-advised fund
That reduces taxable income by $39,300, moving Ben to about $192,700. After planning, his estimated federal tax liability is about $39,095.
That is an estimated reduction of $12,208, mostly because effective management means moving income out of higher brackets into lower ones.
The trade-off is that Ben may pay taxes later when he withdraws from retirement accounts. If future tax rates are potentially lower, deferral may help. If future rates are higher, Roth or charitable strategies may be better.
For those who received sudden wealth, similar tactics can be paired with donor-advised funds, legacy planning, and giving strategies aligned with faith. This example is illustration only, not personalized tax advice; actual planning should be done with a professional.
Increasing Taxable Income Intentionally to Fill Lower Tax Brackets
Susan and Bob recently retired. In 2025, they have $65,000 of taxable income after deductions, before Social Security and required minimum distributions begin.
The 0% long-term capital gains bracket for married filing jointly ends at $96,700. That means they can realize up to $31,700 of gains at 0% tax rate. You can realize up to $31,700 of long-term capital gains tax-free in this example because their taxable income has that much room before crossing the 0% capital gains ceiling.
They also consider a partial roth ira conversion to intentionally boost taxable income while they are still in the 12% bracket. If they convert $20,000, they may pay tax at today’s 12% rate, or about $2,400, rather than allowing that money to grow inside a traditional ira and later face 24% or 32% rates through required minimum distributions.
The right mix matters. More Roth conversion income leaves less room for 0% capital gains harvesting. Additional income may also affect Medicare IRMAA premiums, Social Security taxation, credits, or deductions.
This is why multi-year projections are so useful. A planning window that looks small on a return can create meaningful lifetime savings.
Additional Factors That Can Complicate Tax Bracket Management
Brackets are only one piece of the puzzle. Other rules can change the best strategy in a given tax year.
The net investment income tax is a 3.8% surtax on certain interest, dividends, capital gains, and other investment income. The net investment income tax has not been adjusted since 2013, so more taxpayers are exposed to it as income and assets grow.
Phaseouts and cliffs can also create surprises. A few thousand dollars of additional income may affect Medicare premiums, education credits, premium tax credits, IRA deductions, or other benefits. Some taxpayers are subject to alternative minimum tax or special rules for incentive stock options.
Legislation matters too. Key Tax Cuts and Jobs Act provisions were scheduled to sunset after 2025, but legislation signed by president trump in 2025 made many individual tax rates and deduction rules more permanent. Still, 2026 planning should be checked against current law because retirement, estate, and deduction rules continue to change.
If you have a business sale, legal settlement, inherited assets, concentrated stock, or large gains, coordinate with a CPA and fiduciary planner before acting.
Timing: When to Plan and How Third Act Retirement Planning Can Help
The final quarter of the calendar year is often the most important window for tax bracket management, but the best work starts earlier.
A simple rhythm looks like this:
June–July: Build a mid-year income and tax projection.
October–November: Update wages, gains, deductions, contributions, and charitable plans.
December: Execute final transactions before year-end deadlines.
At Third Act Retirement Planning, our process starts with a discovery call. From there, we gather tax returns, investment statements, retirement account details, estate documents, and spending goals. Then we build a multi-year projection that shows where your income, taxes, withdrawals, and charitable giving may land in future years.
Because we are fee-only and fiduciary, our recommendations are built around your interests, not commissions. We integrate retirement, investment, tax, healthcare, estate, and generosity planning with biblical wisdom.
If you are facing high income years, sudden wealth, a business sale, or a major transition, now is the time to plan. Schedule a discovery call with Third Act Retirement Planning to explore how to use tax bracket management to your advantage and steward your next chapter with confidence.