How Do I Avoid Tax Bracket Creep?
Today’s question is central for anyone who wants to avoid an unpleasant surprise come tax season: what can I do to prevent tax bracket creep? Jake Doser, CFP®, CPWA® joins the Money Wisdom Question Series to share key strategies for lowering your taxable income and curtailing the bracket creep.
Assess Your Tax Circumstance
As its name suggests, tax bracket creep is the slow but sure movement into a higher tax bracket. This phenomenon occurs as your income gradually increases over time, typically in your late 40s, early 50s, or even into your 60s. During this time, you’ve likely positioned yourself well – your career is taking off and you’re earning more money than you ever had before.
If you find yourself in this situation, now’s the time to evaluate your current and future tax situation. Comparing your tax obligation now to what it will be in retirement is key to determining the best time for you to pay taxes.
Maximize Pre-tax Contributions
If you’re earning substantially more income now than you estimate you’ll be earning in retirement, one of the most powerful tools at your disposal to curb your tax burden is making yearly contributions to your 401(k) or other retirement accounts. Specifically, you want to make pre-tax contributions which come out of your paycheck before your income is taxed. This is a tried-and-true method for reducing your taxable income and avoiding being pushed into a higher marginal tax bracket.
Group Charitable Giving
Another way to tackle the bracket creep is to consider a grouping strategy for charitable donations. From a tax perspective, today’s high standard deductions make it difficult to write off charitable giving. One way around this is to consolidate several years’ worth of your charitable contributions in a single year and continue to do so every three to five years. This strategy allows you to write off enough money to raise your itemized deductions higher than a standard deduction, ultimately bringing your taxes down.
As you consider ways to sidestep the tax bracket creep and reduce your lifetime tax bill, it’s important to work in concert with your tax preparer and tax planner, such as a CPA or a financial advisor. At Johnson Brunetti, our team of financial advisors are here to help you manage your tax situation efficiently so you can keep more of what you’ve earned.
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Taxes Simplified
Reducing your tax liability is one of the most effective ways to save money in retirement. Working in tandem with a tax planner or financial professional, you can create a custom, tax-efficient financial plan that aligns with your retirement goals.
