Many Americans think less is more when it comes to income taxes. For them, owing as little as possible means they’ve beaten Uncle Sam.
But many times these filers have it backward. Instead, they should focus on when more can be less for their taxes.
Often, there’s just no way of reducing your taxes by getting into a lower tax bracket. When that’s the case, it sometimes makes sense to use the “headroom” you have in your existing top bracket.
The idea is to strategically accelerate income—if you can afford to pay some more taxes today—so you can reduce overall taxes. With tax-filing season here, now is a good time to think about such moves.
“The point is not just minimizing taxes today, but over your lifetime,” says Eric Bronnenkant, who is head of tax at Edelman Financial Engines.
To be sure, the idea of accelerating income violates the first rule of traditional tax planning, which is to defer taxes whenever possible. But there are reasons to rethink this rule now.
A major one is the growth of tax-favored retirement plans like traditional 401(k)s and IRAs as defined-benefit pensions have waned. These accounts require minimum withdrawals beginning at age 73 that start at about 4% and then rise.
When that happens, they shower recipients with taxable income they can’t avoid.
The payouts are taxed at ordinary income rates like wages, and if owners don’t drain the accounts, many heirs (other than spouses) will have to within 10 years. While surviving spouses can avoid the 10-year rule, their tax rates could rise because they’re no longer filing a joint return.
Travis Babb, a second-generation financial planner and licensed tax professional in Flagstaff, Ariz., says diligent savers who come to him are often stunned when he explains how their required IRA withdrawals, Social Security and small pensions could lock them into the highest tax rates of their lives.
And this income can trigger other levies as well. These are often called “stealth” taxes, and they apply even to taxpayers without overstuffed retirement accounts.
For example, a 3.8% surtax can apply to net investment income earned outside retirement accounts. Collections from this surtax have grown over the last decade because its thresholds—$250,000 for joint filers and $200,000 for singles—aren’t indexed for inflation. And seniors with an income spike may find it raises their income-related Irmaa premiums for Medicare, at least for a year.
This is where strategic accelerations of income can help. While some moves—such as Roth IRA conversions—can require careful analysis, others are simple.
Howard Kelly, a retired corporate finance employee in Naples, Fla., is accelerating taxes on a traditional IRA of about $50,000 he inherited from his mother. He must empty it by the end of 2032, and this year he has withdrawn $6,000. That’s almost double the required minimum withdrawal.
“I don’t want an income balloon to take me from the 24% bracket to the 32% tax bracket in the last year or push me into higher Irmaa premiums,” he says.
The good news is that current tax rates and wide brackets help with this planning. In particular, the 22% and 24% brackets are close, and they stretch from almost $100,000 to almost $400,000 of taxable income for married joint filers.
That’s a lot of headroom to deploy, so here are moves to consider if accelerating income could benefit you.
Timing income
Consider the tax effects of income you control the timing of. Could accelerating some of it make sense? For example, someone might have a concentrated position of stock they will need to sell. Instead of selling it all at once, this person could check whether selling it in pieces over two or more years will keep the tax rate lower or avoid the 3.8% surtax.
Stock options often have flexible features, as do the start dates for pensions and Social Security. Someone who can see a windfall like a large bonus coming might want to arrange other income to hold down taxes.
Caveat: Don’t let the tax tail wag the dog by ignoring other key factors like market risk.
Roth IRA, Roth 401(k) and Solo Roth 401(k) contributions
Dollars going into these accounts are after tax, so there’s no tax break on contributions as there is for dollars going into traditional IRAs and 401(k)s. But both growth and withdrawals can be tax-free, and there are no required withdrawals for the original owner. For details, see IRS Publication 590-B.
Funding Roth accounts makes the most sense for savers when tax rates are lower on contributions than they would be at withdrawal if payouts were taxable. Various limits apply, so for more information see here and IRS Publication 590-A.
Roth IRA and Roth 401(k) conversions
Savers can convert traditional IRAs and 401(k)s to Roth accounts, with tax due on the conversion, to reap the Roth benefits described above. As with direct contributions, conversions make most sense when tax rates on them are lower than they would be at withdrawal.
Note that many Roth 401(k) workplace plans allow savers to do taxable “in-plan” conversions of amounts in their traditional 401(k). This is an option for would-be Roth converters who don’t have traditional IRAs.
Inherited traditional IRAs
Most heirs of traditional IRAs who aren’t spouses have to drain them within 10 years, and they also have to take minimum withdrawals annually if the owner was required to take them.
These withdrawals are likely to be low, however. Babb often urges heirs to consider accelerating income and taking more than required to prevent an income surge in the 10th year that could raise their tax rate and trigger other levies.
The zero rate on investment income
Married joint filers with taxable income below $96,700 and singles below $48,350 in 2025 owe zero tax on investment income like long-term capital gains and qualified dividends. How this provision works is complex, but taxpayers in this bracket shouldn’t let it go to waste.
For example, someone could sell a holding in a taxable account, owe no tax on gains, and then repurchase right away if desired. Holdings sold at a gain aren’t subject to wash-sale penalties.
Caveat: Zero-rate strategies can backfire for lower-income taxpayers receiving Social Security payments or Affordable Care Act (Obamacare) subsidies for health coverage.
Write to Laura Saunders at Laura.Saunders@wsj.com