A raise or bonus feels great—until tax season hits, and you owe more than expected. This tax-bracket creep happens when higher wages push you into a new tax bracket, increasing your tax bill.
While federal tax brackets adjust for inflation, many deductions and credits do not, meaning you could pay more in taxes even if your purchasing power stays the same.
Fortunately, smart strategies can lower taxable income and reduce tax-bracket creep. Some take long-term planning, while others offer immediate relief—like earning extra cash without adding taxable wages.
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1. Defer income when possible
Timing matters if you’re on the edge of a higher tax bracket. Deferring income to the following year can help keep you in a lower bracket and reduce your overall tax liability.
Ways to defer income:
- Delay year-end bonuses if your employer allows.
- Push stock sales into the next tax year.
- Postpone freelance or contract payments if you have flexibility.
If you expect to be in a lower tax bracket next year, shifting taxable income to the future can prevent you from paying unnecessary taxes today.
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2. Maximize retirement contributions
One of the most effective ways to lower your taxable income is by contributing more to tax-advantaged retirement accounts. Contributions to traditional 401(k)s and IRAs reduce your taxable income dollar-for-dollar, which can help prevent you from creeping into a higher tax bracket.
- 401(k) limits for 2025: $23,500 (plus $7,500 for those 50+)
- IRA limits for 2025: $7,000 (plus $1,000 for those 50+)
If you got a raise this year, consider increasing your contribution percentage—it’s a tax-smart way to build wealth.
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3. Use tax-loss harvesting
If you have investments that have dropped in value, you may be able to use tax-loss harvesting to offset capital gains and lower your taxable income.
How it works:
- Sell underperforming investments to realize a loss.
- Offset up to $3,000 of ordinary income with those losses.
- Carry forward excess losses to future years to reduce future tax liability.
This strategy is especially useful if you’ve taken capital gains on other investments this year. Just follow the wash-sale rule, which prohibits buying the same investment within 30 days of selling at a loss.
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4. Consider a Roth conversion
If you expect to be in a higher tax bracket in retirement, converting a traditional IRA to a Roth IRA now could be a smart move.
Roth conversions require paying taxes upfront, but they come with major benefits:
- No required minimum distributions (RMDs) in retirement.
- Tax-free withdrawals after age 59½ (if held for 5+ years).
- Protection against future tax rate increases.
If your income is lower this year than it will be in the future, making a partial Roth conversion could help reduce future tax liability.
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5. Take advantage of an HSA
A Health Savings Account (HSA) isn’t just for medical expenses—it’s also a tax-efficient way to lower your taxable income and grow wealth.
2025 HSA contribution limits:
- $4,300 for individuals
- $8,550 for families
- $1,000 catch-up for those 55+
HSAs offer a triple tax advantage:
- Contributions reduce taxable income
- Funds grow tax-free
- Withdrawals for qualified expenses are tax-free
Even if you don’t use the funds now, HSAs roll over indefinitely, making them a great long-term tax shelter.
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6. Optimize asset location
The type of account where you hold investments impacts how much tax you pay. You can minimize taxable income by strategically placing assets in the right accounts.
Where to place investments for tax efficiency:
- Taxable accounts: Hold tax-efficient investments like ETFs and municipal bonds.
- Tax-deferred accounts: Use for bonds and actively managed funds to avoid high annual taxes.
- Tax-free accounts: Roth IRAs work well for high-growth investments.
Placing the right investments in the right accounts helps reduce tax drag on returns.
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7. Make strategic charitable donations
Giving to charity can lower your taxable income, but you need the right strategy to maximize tax benefits.
Ways to optimize charitable giving:
- Bunch donations into one year to exceed the standard deduction.
- Donate appreciated assets to avoid capital gains taxes.
- Use a donor-advised fund (DAF) to spread out donations over multiple years while getting an immediate deduction.
If you’re required to take required minimum distributions (RMDs), a Qualified Charitable Distribution (QCD) can reduce taxable income while supporting a good cause.
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Take Control of Your Tax Bill
Tax-bracket creep can chip away at your income, but proactive planning can keep more money in your pocket. Maximizing deductions, deferring income, and optimizing investments can help reduce taxable income and build long-term wealth.
Even minor adjustments can lead to significant tax savings, but knowing the best moves to make isn’t always straightforward. Professional guidance can help you navigate tax strategies and ensure you make the most of every opportunity.
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