While increases in wages help taxpayers keep pace with rising costs and inflation, they might potentially push many into higher tax brackets. This phenomenon, referred to as tax-bracket creep, can result in a negative impact on your household income as rising costs coupled with higher tax rates eat away at additional wages.  In light of economic forces and a changing tax landscape, strategic tax planning is more crucial than ever and managing your taxable income can be an effective way to lower your overall tax burden. Here’s a summary of eight actionable steps to consider if you find yourself needing to reduce taxable income to avoid falling into a higher tax bracket:

1. Maximize Retirement Contributions
   Contributions to retirement plans, whether a workplace plan like a 401(k) or individual plan such as an IRA, can reduce taxable income dollar-for-dollar. For 2025, the contribution limits are $23,500 for a 401(k) (catch-up contributions allowed for those over 50) and $7,000 for IRAs ($1,000 extra for those over 50). The tables below detail the 2025 contribution limits and catch-up contribution amounts for 401(k) and IRA plans.

2. Utilize Health Savings Accounts (HSAs)
   Contributions to HSAs, available to those with high-deductible health plans, are tax-deductible and grow tax-free. The HSA contribution limits for 2025 are $4,300 for self-only coverage and $8,550 for family coverage. Those 55 and older are eligible to contribute an additional $1,000 as a catch-up contribution.

3. Defer Income
   If a large payout (e.g., from property sales, sale of a business, or severance) might bump you into a higher tax bracket, consider deferring the income to the following year when possible. This could help you avoid a higher tax rate.

4. Consider Roth Conversions
   While converting a traditional IRA to a Roth is taxable, Roth accounts grow tax-free, lack the minimum distributions required by a Traditional IRA, and withdrawals in retirement are tax-exempt. Strategic planning of a conversion can spread the current tax burden to lower income years and reduce taxable income in future years when tax rates could potentially be higher.

5. Leverage Tax-Loss Harvesting
   Offset capital gains by selling underperforming investments at a loss. These losses can also offset up to $3,000 of ordinary income annually, depending on your tax filing status.

6. Optimize Asset Location
   Different types of investments are better suited for specific financial goals. Consider putting investments with higher-tax consequences, like interest bearing bonds that are taxed at ordinary tax rates, into accounts with more favorable tax treatment, like a Roth account. Likewise, consider holding investments with more favorable tax consequences, such as dividend and capital gains, in a brokerage account as the resulting income might be taxed at a rate lower than your wages and other ordinary income.

7. Make Qualified Charitable Distributions (QCDs)
   Those 70½ and older can make QCDs to charitable organizations from IRAs to satisfy RMD requirements while excluding the amount donated from taxable income. Limits are $108,000 for individuals and $216,000 for couples in 2025.

8. Bundle Charitable Contributions
   Grouping charitable donations into one year can maximize tax deductions for those who find themselves short of enough deductions annually to itemize deductions under the current tax laws. This strategy can be used for both cash and non-cash contributions. You might also consider donating appreciated assets held longer than one year to a qualified public charity and deducting the fair market value of the asset without paying capital gains tax if you sold the asset. Lastly, consider donor-advised funds (DAFs) for long-term giving while benefiting from an immediate tax deduction.

As tax brackets and deductions shift annually, proactive tax planning can protect you from unnecessary tax burdens. Contact us today if you would like more information on any of these topics or if you would like us to tailor a personalized plan based on your specific financial situation to mitigate the risk of tax-bracket creep.