Pay tax earlier to avoid higher tax later

https://www.wsj.com/personal-finance/taxes/when-paying-more-tax-not-less-is-the-smart-play-bab46ee5?mod=hp_lead_pos9

When Paying More Tax, Not Less, Is the Smart Play

Taxpayers should consider whether strategically ‘accelerating’ their income—and paying tax on it—can reduce what they’ll owe Uncle Sam over time

By

Laura Saunders, The Wall Street Journal, Jan. 31, 2025


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…“The point is not just minimizing taxes today, but over your lifetime…”

[snip part about RMDs from IRAs]

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…

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. …[end quote]

The concept of “headroom” in tax brackets is good. Nobody knows how Congress will re-formulate the tax brackets in 2025 since the 2017 tax law is expiring.

Wendy

6 Likes

The tax brackets will revert to their previous levels unless Congress acts. The question to consider is if Congress will be able to act. Let’s just say there isn’t a lot of collegiality in DC these days. And that makes it harder to get anything done.

—Peter

1 Like

I have been pulling modest amounts from my conventional IRA, since the moment I was able to, without penalty, to reduce the size of RMDs, in the future.

Of course, the new administration has a stated goal of eliminating the income tax, and generating all revenue from tariffs and user fees. Then IRA withdrawals would be tax free.

Steve

2 Likes

Well, tax cuts for the wealthy are the #1 priority for the new Administration and will have strong support among the corporate DEMs. I have a pretty good idea what’s going to happen.

intercst

2 Likes

Correct. Just like waiting until age 70 to take SS maximizes your income over your lifetime for people without a medical diagnosis that guarantees a shorter lifespan.

Too many people use “bird in the hand” financial planning.

intercst

4 Likes

Don’t forget that IRMAA kicks in somewhere in that range. And it’s based on AGI (not taxable income) from 2 years ago.
The cost of your Medicare might go up - best to calculate whether it’s worth it.

3 Likes

It depends upon one’s assets, but the $100-400K range is so broad that many are unlikely to bump up over the top into the next bracket later in life.

Of course, tax brackets have been known to change over the decades…

DB2