Gauge your tax bracket to drive tax planning at year-end

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 10/29/19

Gauge your tax bracket to drive tax planning at year-end

There is one important number for investors to know that can drive tax-planning strategies at year-end: their marginal tax bracket.

Projecting likely income for the year and knowing the marginal tax bracket will provide important information for taxpayers. The marginal tax bracket determines the cost of adding an additional dollar of income, or the savings that could result from reducing a dollar in income before year-end.

Current tax brackets are at the lowest range in years as a result of tax reform.

There are several strategies that investors may consider to make the most of their tax brackets.

Don’t forget about the zero percent tax rate on capital gains and dividends

Taxpayers in lower income tax brackets may be able to avoid taxation on long-term capital gains and qualified dividends. Here are the current tax rates and income thresholds for 2019.

For example, consider a married couple, age 65+, filing a joint tax return and claiming the standard deduction of $27,000.

  • Assume their income is $80,000 before deductions
  • Taxable income would be $80,000 less the standard deduction of $27,000 = $53,000
  • The couple could realize about $25,000 of long-term capital gains and/or qualified dividends at a zero percent tax rate (the threshold for 2019 is $78,750)

Maximize the tax bracket potential

With the risk of tax rates edging higher in the future, some investors may want to consider “filling up” their tax bracket with additional income. A tax professional can help determine whether adding more income before year-end makes sense.

Taxpayers may use a Roth IRA conversion to fill up the remaining room left in a tax bracket with additional income. For example, an individual taxpayer with projected taxable income in 2019 of $140,000 could conceivably convert roughly $20,000 of a traditional IRA to a Roth and still be subject to the 24% marginal tax bracket. Any additional income would be taxed at the much higher 32% marginal tax bracket. These funds (and subsequent appreciation) could be withdrawn tax free in the future.

To see additional Roth strategies, read our post “Planning strategies to prepare if taxes move higher.”

For the full list of all brackets and other tax information, see “2019 tax rates, schedules, and contribution limits.”

Target a threshold

If taxpayers filing a joint return are realizing long-term capital gains or qualified dividends, it may make sense to not exceed $250,000 in income (defined as modified adjusted gross income). By staying under the $250,000 threshold, taxpayers may avoid the 3.8% surtax on investment income. For individuals, the threshold for the 3.8% surtax is $200,000. For more information, read Putnam’s investor education piece, “Planning for the 3.8% Medicare investment income surtax.”

Is it wise to reduce income?

Taxpayers in higher income tax brackets may benefit from reducing taxable income before the end of the year. Some ideas include the tactical use of deductions such as charitable giving or retirement account contributions.

Tax planning is specific for individuals

Knowing the expected tax bracket is a good start for year-end planning. Investors should discuss the implications of tax mitigation strategies with a financial advisor who understands their individual tax situations. Implementing these strategies before year-end may help optimize the advantages of the current tax brackets.


advisor-only webcast

Advisors and their clients are still learning about new opportunities to reduce taxes under the recent changes to the tax code. Our upcoming advisor-only webcast will detail actionable strategies for year-end planning.

Register for our “Year-end planning strategies for financial advisors” webcast.


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