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Q3 Financial Planning Commentary

As we move into the fall season, our meetings will begin to focus on tax planning. Most strategies have a December 31st deadline in order to be effective for your 2023 taxes, so starting discussions now ensures that we have time to implement any actions that may be needed.

At the core of all tax planning lies the concept of income tax brackets. As you know, taxpayers pay the tax rate in a given bracket only for that portion of their overall income that falls within that bracket’s range. Here are the current income tax brackets for 2023:

Tax RateSingleMarried filing
Married filing separatelyHead of household
10%$0 to
$0 to
$0 to
$0 to
12%$11,001 to
$22,001 to
$11,001 to
$15,701 to
22%$44,726 to
$89,451 to
$44,726 to
$59,851 to
24%$95,376 to
$190,751 to $364,200.$95,376 to
$95,351 to
32%$182,101 to $231,250.$364,201 to $462,500.$182,101 to
$182,101 to $231,250.
35%$231,251 to $578,125.$462,501 to $693,750.$231,251 to
$231,251 to $578,100.
37%$578,126 or more.$693,751 or more.$346,876 or more.$578,101 or more.

By way of example, say a married couple, filing jointly for the 2023 tax year, had a taxable income of $200,000. Each dollar over $190,750 – or $9,250 – would fall into the 24% federal income tax bracket. However, the couple’s total federal tax would be $34,800 – about 17.4% of their adjusted gross income.

Where the interesting planning happens is not simply in determining what your marginal and effective tax rates will be this year. Instead, when we look at current and future taxable income and tax rates, we can begin to identify strategies that may help minimize your overall tax burden over time. Most of these strategies involve ways to try and reduce taxable income. Reasons for reducing taxable income include:

  • Avoiding income-based phaseouts for available credits and/or deductions.
  • Keeping taxable income below thresholds for surtaxes (such as the net investment income tax).
  • Capturing deductions during peak income years (such as just before retirement) instead of during later, lower income years.

As strange as it may seem at first glance, there are also situations in which it makes sense to purposefully generate taxable income in a given year. Why would this make sense to do? Typically, it comes down to capturing benefits that exist today but may be gone in the future, including:

  • The standard deduction and non-refundable credits are all “use it or lose it” – if your taxable income is not high enough to fully capture these, their benefits can be lost.
  • For those who are retired, but not yet of the required minimum distribution (RMD) age, taxable income is currently low and will jump up at RMD age. Taking income now can reduce income during the RMD years.
  • The current tax brackets are historically low and are set to increase in 2026. Filling up those lower tax brackets with retirement account distributions means they won’t be taxed as heavily in the future.

Some of the tools we can use to possibly adjust taxable income include donor advised fund contributions (to reduce taxable income), Roth conversions (to increase taxable income), tax-loss harvesting (to reduce capital gains income), and taxable portfolio rebalancing (which increases capital gains income). These are just the tip of the iceberg, and the unique circumstances of each family will dictate which potential strategies come into play.

As always, please do not hesitate to reach out if you have questions about your own tax situation, or anything else.


Waypoint Capital Advisors