Managing your Tax Bracket

We continue to hear about the possibility of the current Biden administration increasing taxes on those making over $400,000 but the one thing we do know is that taxes for everybody will increase in 2026 when the Tax Cuts and Jobs Act (TCJA) expires at the end of 2025. While that seemed like light years away when it was passed back in 2017, we now only have four years left at the current and historical low Federal tax rates.

Our advice in the current tax environment is two-fold:

Filling your Bracket

I like to think of the tax brackets like buckets of water. You want to your taxable income to fill up the lowest bracket/bucket possible and not have it overflow into that next bracket/bucket. By using flexible tax planning tools like the Sec 179 depreciation and Profit Sharing you can fill your bracket as you see fit.

For example, a married dentist with taxable income of $365,000 for 2022 but also purchased a CEREC mill for $50,000. His marginal tax rate without Sec 179 (see chart below) would be 32% but he could take Sec 179 depreciation on the new mill of $35,500 and slide down a bracket to a marginal rate of only 24%. This 8% bracket jump is the biggest jump in the tax code and something to avoid if possible.

Pay them NOW to avoid paying MORE later

Unlike the Now & Later candy that brings flavor now and later, this strategy hurts a bit now but brings you pleasure down the road. Rather than doing everything you can to save taxes now, you can forgo taking immediate tax deductions this year and save those for future years. This is a very unconventional concept in tax planning and works contrary to human preference for immediate gratification.

Take for example, a married dentist with taxable income of $500,000 for 2024 but also purchased an implant robot for $2000,000. Her marginal tax rate without Sec 179 (see chart above) is 35%. She could take Sec 179 depreciation on the new robot of $172,000 and slide down a bracket to a marginal rate of only 24%. But by taking the Sec 179 deduction in the current year (2024), she would lose that future depreciation. If she continues on the same income path, she is moving into the highest bracket of 39.6% and it would certainly be nice to have that depreciation to reduce taxable income.

A quick review of the chart above will reveal how everybody’s taxes will increase in 2026, but especially for those making over $153,100. Due to the future jump in tax brackets, we will be working with our clients to not only manage this year’s tax bill but to consider how decisions to reduce the current year tax bill might affect things four years down the road.