About two-thirds of 2025 has come and gone. If your projected income for the year will push you into a higher tax bracket before it ends, you still have time to act to avoid that outcome.
As tax-related problems go, this is a good one to have. In this situation, your goal is to maximize the amount of money that you will keep under your control. If your income is on track to exceed a threshold that will put you into a higher tax bracket, Uncle Sam will take a bigger bite out of what you earn and that's what you want to avoid.
The first step to see if you'll even have this as a potential problem is to estimate what your total income for the year will be. After you've done that, you'll want to estimate your taxable income, which is really easy. If you will be filing a single return, just subtract 2025's standard deduction of $15,000 from your total projected income. If you will file a joint return, subtract the standard deduction of $30,000 from your combined income.
Have your number? See how your taxable income fits within the following ordinary income tax brackets for single and joint filers:
| Entry Level Taxable Income for U.S. Ordinary Income Tax Brackets | ||
|---|---|---|
| Income Tax Bracket (Tax Rate) | Single Filer Taxable Income Needed to Enter Bracket | Joint Filer Taxable Income Needed to Enter Bracket |
| 10% | $0 | $0 |
| 12% | $21,926 | $23,851 |
| 22% | $48,476 | $96,951 |
| 24% | $103,351 | $206,701 |
| 32% | $197,301 | $394,601 |
| 35% | $250,526 | $501,051 |
| 37% | $626,351 | $751,601 |
The thing you're looking for is whether your taxable income is above the entry level taxable income for a given tax bracket. If it is, all income you earn will above that number will be taxed at a higher rate. Unless you act to reduce your taxable income to put it into the next lower tax bracket.
Charles Schwab's Hayden Adams has some suggestions to do that, using a hypothetical taxpaying scenario:
Let's say Ben, a single filer, is on track to make $242,000 in 2025. After factoring in the $15,000 standard deduction and a $19,360 contribution to a pre-tax 401(k), Ben's taxable ordinary income is $207,640 for the year ($242,000 minus $19,360 minus $15,000). At that level of income, $10,340 of taxable income would fall into the 32% ordinary income tax bracket (which kicks in after $197,300 of income). Here are some ways Ben could reduce his income:
- Boost 401(k) contribution. The limit for 2025 is $23,500 for those under 50, so Ben contribute an additional $4,140 his 401(k). Plus…
- Maximize contributions to an HSA. The limit for 2025 is $4,300, so making the max contribution would reduce Ben's income even further (assuming he is eligible). Plus…
- Tax loss harvesting. Up to $3,000 of net capital losses can be used to offset ordinary income, so if Ben harvesting at least $1,900 in losses he would wipe out the income that falls into the 32% tax bracket.
"401(k)" refers to the popular retirement investment account many Americans have available through their employers, in which they set aside a "pre-tax" percentage of their income. "HSA" is a reference to a tax-exempt Health Savings Account that you would most likely also have through your employer.
Tax loss harvesting however is a whole different thing. It requires you to have investments outside of your 401(k) or HSA accounts. And if the name of the concept doesn't give it away, it requires you to lose money on at least part of your investments in that account to claim as losses on your income tax return to offset your taxable income.
Finally, Adams' hypothetical taxpayer is pretty well to do, but engaging in this kind of lawful taxable income management can pay off for people with much lower incomes. If Ben's projected taxable income for 2025 were just above the $48,476 threshold for the 22% threshold, then Ben would have a very powerful incentive to reduce his taxable income. The jump in tax rate from the 12% bracket to the 22% bracket is the largest in the tax tables, so if Ben's taxable income is within striking distance of $48,476 for the options available to him, anything he can do to reduce his taxable income below that level would be very beneficial in avoiding Uncle Sam taking too big a bite out of the income he earns.
Image Credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a taxpayer trying to prevent Uncle Sam from taking too much of their income". Which we followed up with "Make it more colorful".
Labels: ideas, income, personal finance, taxes
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