How to Prepare for Moving up (or Down) the Tax Bracket
Tax season would be easier if we could set it and forget it—if our tax obligations were consistent from year to year and our withholdings were perfectly balanced to minimize surprises when it comes time to file.
However, there are a number of situations , such as a job change (losing a job, changing jobs, or getting a promotion) or a lifestyle change (marriage, divorce, or having a child), that could move you up the career ladder or lower your tax bracket, which could change your debt to the IRS.
We have a guide to tax brackets for 2024 to help you figure out where you fall, but keep in mind that these are marginal tax rates, so it’s a little more complicated than multiplying one percent by your entire income. It may also be more difficult to determine your tax liability if you are an independent contractor, freelance worker, or self-employed and have to make estimated payments due to income fluctuations throughout the year.
If you’re expecting (or surprised by) a major life event this year that could move you up or down the tax brackets, here’s how to prepare.
Don’t wait until tax season
First things first: Don’t wait until the end of the tax year in December to evaluate your tax situation. Of course, you shouldn’t wait until March or April when the return deadline comes. Taxes are a year-round, not an annual project—even if you don’t have to make quarterly estimated tax payments (for example, on self-employment income), you should regularly consider your tax obligations as part of your overall financial health.
If you expect or experience a change in your income or filing status, see how it will affect your taxes for the year as quickly as possible. By the time application deadlines approach, there is little you can do to avoid surprises.
Pull out last year’s profits
Henry Grzes, senior manager of tax practice and ethics at the American Institute of CPAs, recommends starting with the previous year’s return. “For the most part, income and deductions typically don’t change much from year to year,” Grzes says, unless you earn 1099 income from self-employment or a side hustle or have a capital gain.
You can use last year’s tax return to make a rough estimate using a tax calculator (there are free tools from TurboTax , H&R Block and the IRS ) and updated information, such as moving from a single filer to a joint family filer or to a higher or higher lower gross income.
Explore possible strategies
The tax system is complex, so it’s often helpful to hire a professional to help you throughout the year (more on this below). But you should also do your due diligence regarding credits, deductions and withholdings to better anticipate your liability.
For example, if you know you’re having a baby this year, you may be eligible for the Child Tax Credit or the Child and Dependent Care Credit.
If you are a W-2 employee, you may also need to adjust your tax withholding on Form W-4 , where you can change your filing status and add dependents and other income. Grzes says changing your withholding depends on your philosophy and whether you prefer a big return in the spring or whether you have the discipline to put money aside in case you owe the balance on your return.
Note that self-employed individuals and independent contractors may need to set aside more funds for quarterly payments if they expect higher incomes and higher tax rates.
Ask a Pro
Even if your taxes are relatively simple (for example, you only have W-2 income and take the standard deduction), you can still benefit from working with a tax professional who can help you reduce the impact of any tax bracket change. for example, credits and deductions you’ve recently qualified for, or putting some of your increased income toward retirement contributions or a flexible spending account.
Find a tax preparer who knows what they’re doing —ideally, someone you can consult year-round.