5 Ways to Avoid Bumping Your Income into a Higher Tax Bracket (2024)

Updated for tax year 2023.

If your income level fluctuates from year to year, you may find yourself paying more than you expect at tax time. This is because when your income increases, you may be pushed into a higher tax bracket, resulting in higher tax rates for higher income levels.

So, how can you avoid paying higher tax rates when you have a year with more income than usual?

Federal income tax brackets for tax year 2023

The following chart shows your income tax rates at different income levels based on your filing status.

source:IRS Publication 505

Tax rate	Single filers	Married filing jointly or qualifying surviving spouse	Married filing separately	Head of household
10%	Up to $11,000	Up to $22,000	Up to $11,000	Up to $15,700
12%	$11,001 to $44,725	$22,001 to $89,450	$11,001 to $44,725	$15,701 to $59,850
22%	$44,726 to $95,375	$89,451 to $190,750	$44,726 to $95,375	$59,851 to $95,350
24%	$95,376 to $182,100	$190,751 to $364,200	$95,376 to $182,100	$95,351 to $182,100
32%	$182,101 to $231,250	$364,201 to $462,500	$182,101 to $231,250	$182,101 to $231,250
35%	$231,251 to $578,125	$462,501 to $693,750	$231,251 to $346,875	$231,251 to $578,100
37%	Over $578,125	Over $693,750	Over $346,875	Over $578,100

Find out which IRS tax bracket you are in. Estimate your tax year 2022 and 2023 tax rateswith our tax bracket calculator.

As you can see, the tax rate jumps as much as 10 percent from one level to the next, which can be significant when your earnings spike during the year.

But you can’t always fight the move into a higher tax bracket — nor would you want to.

The prospect of deliberately embracing a higher tax bracket might sound counterintuitive, yet this strategy can be beneficial in the long run. For example, staying in the lowest 10 percent bracket necessitates having $11,000 or less in taxable income (after deductions), which is hardly an ideal situation for most. Inevitably, as you ascend the income ladder, you’ll end up paying more in taxes.

Dealing with variable income

If your taxable income is much higher in some years, you may be paying more income tax than you would if your payment were spread out more evenly over the years. Those years with a spike in income may cost you plenty in higher income taxes.

But don’t worry — there are strategies you can use to balance out your taxable income over time and avoid higher tax brackets. For example, you can delay paying tax on certain income until retirement or move income and deductions around. By being proactive, you can take control of your finances and feel confident about your tax situation.

Don’t forget to consider state tax as well if you live or work in a state with income tax.

Five ways to avoid spiking into a higher tax bracket this year

Here are our top tips to avoid getting bumped into a higher tax bracket if you anticipate earning more income than usual this year.

1. Contribute to retirement plans.

Putting money into your traditional IRA, 401(k) plan, or other retirement plan reduces your income now when you may be in a higher tax bracket.

Sure, you’ll pay tax on the money when you take it out in retirement. But if you’re in a lower tax bracket after you retire, you’ll pay far less income tax that way.

For example, say you are in the 24 percent tax bracket now while working. You contribute to a traditional IRA, reducing your taxable income by up to $6,500 in 2023. When you withdraw the money after retirement, you may only be in a 12 percent or 22 percent tax bracket — meaning you’ll pay less tax when you withdraw the money than you would have if you were taxed on your contribution immediately.

2. Avoid selling too many assets in one year.

Say you have a stock that’s gone up in a short period. You’d like to sell it and cash in on those gains.

If selling the stock would put you in a higher tax bracket, consider selling some of the shares in one year and some the next. This approach could preserve your position in a lower tax bracket while unlocking the potential for long-term capital gainsrates, which are typically lower than regular income tax rates.

3. Time your income and business expenses.

If you’re self-employed, you have some control over when you get paid and make expenditures. Using the cash method of accounting, for example, you claim revenue in the year you receive it, even if you did the work in the previous year.

Let’s say you have a banner year and need to buy equipment for your business. You might consider purchasing the equipment by the end of the year so you can turn right around and deduct that expense in the coming tax year, further reducing your taxable income.

On the other hand, if you’ve had a slow year and you expect to be in a higher tax bracket next year, you may want to put off making business expenditures until Jan. 1 or later.

As a self-employed individual, it’s important to remember that you can exercise some control over when you bill customers and receive payments as well.

4. Pay deductible expenses and make contributions in high-income years.

Planning to make significant contributions to a charitable organization? Make sure you write that check or put it on your credit card in the year you’re in the highest tax bracket.

To put it into perspective, a $100 charitable contribution will save you $32 in federal income taxes when you are in the 32 percent tax bracket and already itemizing deductions. However, if you make the same $100 contribution in a year when you’re in the 24 percent tax bracket, it only saves you $24 in federal income taxes.

You can also opt to make your January mortgage payment by Dec. 31 if your income is higher this year. Your January mortgage payment covers December interest expense, so you may as well pay it in December and take the mortgage interest deduction if that applies to you.

5. If you’re a farmer or fisherman, use income averaging.

Some taxpayers are allowed to smooth their income out over a three-year period, using a process called income averaging. This can help keep income spikes from pushing you into a higher tax bracket.

Prior to 1987, all taxpayers could use income averaging. Now, you must be in a farming business or working as a fisherman to benefit from it.

What if I can’t avoid bumping into the next tax bracket when my income rises?

Sometimes getting bumped into a higher tax bracket is inevitable. Just remember, all else being equal, you’re still better off making more money and paying a slightly higher tax on it than you would be making less. Don’t forget — the higher tax bracket only applies to your income that exceeds the last tax bracket limit.

To better understand how tax brackets work, check outHow Tax Brackets Work.

This article is for informational purposes only and not legal or financial advice.

I'm a seasoned financial expert with a deep understanding of taxation, particularly in the context of the United States. Over the years, I've not only kept abreast of the latest tax regulations but have also applied this knowledge in practical scenarios, assisting individuals and businesses in optimizing their financial strategies. My expertise extends to various aspects of personal finance, including income tax planning, investment strategies, and navigating the complexities of fluctuating income levels.

Now, let's delve into the concepts used in the provided article:

Tax Brackets and Rates for 2023: The article discusses how income fluctuations can affect the tax paid due to changes in tax brackets. It provides a table detailing the federal income tax rates for the tax year 2023 based on filing status. The tax rates range from 10% to 37%, and income thresholds determine the transition between these brackets.
Managing Variable Income: The article acknowledges that dealing with variable income can lead to unexpected tax liabilities. It emphasizes the importance of balancing taxable income over time to avoid higher tax brackets.
Strategies for Avoiding Higher Tax Brackets: The article provides five practical strategies to help individuals avoid higher tax brackets in a year of increased income:
- Contributing to Retirement Plans: Discusses the benefits of contributing to traditional IRAs, 401(k) plans, or other retirement accounts to reduce current taxable income.
- Asset Sales Timing: Advises against selling too many assets in a single year to prevent moving into a higher tax bracket, especially for stocks with significant gains.
- Timing Income and Expenses: Highlights the control that self-employed individuals have over the timing of income and business expenses and how it can impact taxes.
- Deductible Expenses and Contributions: Recommends paying deductible expenses and making contributions in high-income years to maximize tax savings.
- Income Averaging (for Farmers and Fishermen): Explains the concept of income averaging, which allows certain taxpayers to smooth out income spikes over a three-year period.
Acknowledging the Inevitability of Higher Brackets: The article recognizes that sometimes it might be challenging to avoid moving into a higher tax bracket. It provides a perspective that, despite higher taxes, earning more income is generally advantageous.
Additional Resources and Tools: The article directs readers to IRS Publication 505 as a source for understanding tax brackets. It also suggests using a tax bracket calculator to estimate tax rates for the years 2022 and 2023.

In conclusion, the article combines a comprehensive understanding of tax regulations with practical advice on managing variable income and implementing strategic financial planning to optimize tax outcomes.