You're Headed for a Big Tax Year. Now What?
This unusually high income year could be for any number of reasons.
1) Maybe you sold your house.
2) Maybe a business you've spent decades building finally closed.
3) Maybe you sold some stock, got a severance, or your income just ran unusually high this year for reasons that felt good at the time and now feel complicated.
Whatever the reason, you can see it coming: this year's tax bill is going to be bigger than normal. A lot bigger!
The question most people ask at this point is: "How bad is it going to be?"
The better question probably is: "What can I proactively do about it?"
Because here's the thing, a high-income year isn't just something that happens to you. With a little planning, you can minimize the tax blow a bit.
Several of the most effective tax strategies make loads of sense in a year like this one.
Here are three worth knowing about.
1. Pre-Fund Years of Charitable Giving With a Donor-Advised Fund (DAF)
If you give money to charity, this type of account can be an absolute game-changer.
Most people who give consistently don’t receive a tax benefit for doing so. To deduct charitable contributions, you have to “itemize your deductions” (excluding the small charitable deduction for non-itemizers, which is pretty insignificant)
And to itemize, your total deductions have to exceed the standard deduction, which for a married couple in 2026 is a whopping $32,200.
For most people in most years, their charitable giving, mortgage interest, and state and local taxes don't clear that bar. So they take the standard deduction, and their giving is essentially invisible to the IRS and does not benefit them from a tax perspective.
A Donor-Advised Fund (DAF) is essentially a charitable holding account that you establish at Charles Schwab, Fidelity, etc. They act as the charity, but you establish and fund an account under their broader charity, from which you facilitate your giving.
Here’s the magic sauce:
If you are charitably inclined and recognize that this is a big tax year, you could make several years’ worth of your charitable giving now into the DAF (which allows you to itemize and receive a hefty tax write-off), take the large deduction immediately, and then distribute gifts to the charities of your choosing on whatever timeline you want - annually, quarterly, whenever.
✔️ The charity gets its money.
✔️ You get a large deduction in the year you fund the account.
✔️ If you fund the account with appreciated stock as opposed to cash, you never pay capital gains tax on the growth.
So if you normally give $10,000 a year to your church and a few other organizations, instead of writing a check this year, you contribute five or six years of giving ($50,000 to $60,000) to a DAF all at once.
That contribution is fully deductible this year, when it actually moves the needle.
Within your DAF, you make gifts of $10,000 a year to the same charities, on the same schedule as always.
The only thing that changed is when the deduction happens.
It gets better if you have appreciated stock. As I mentioned above, instead of contributing cash to the DAF, you can transfer high-gain stock that you’re holding in a brokerage account.
The DAF receives the shares, sells them internally, and holds the cash for future grants. Why does this matter?
Because if you sold that stock yourself, you'd owe capital gains tax on the appreciation. Transfer it to the DAF instead, and that gain disappears entirely, you never pay tax on it, and you still get the full fair market value as a deduction.
The math: say you have $60,000 of Nvidia that you originally bought for $10,000. That's $50,000 in unrealized gains.
Sell it yourself, and you're looking at roughly $7,800 in capital gains tax at the 15% rate, potentially more.
However, if you transfer those shares to a DAF, that tax goes away, plus you get a $60,000 charitable deduction on top of it.
For someone already facing a large tax bill, the combination of a sizable deduction and avoided capital gains can be genuinely meaningful.
2. Increase Your Retirement Contributions
I know, not the most exotic and exciting.
This one only applies if you still have earned income like W-2 wages, self-employment income, or business income.
But if you do, a high-income year is exactly when maximizing retirement contributions matters most.
Every dollar you contribute to a traditional 401(k), 403(b), or IRA reduces your taxable income dollar for dollar in the year you contribute.
In a normal year, that's useful. In a year where you're already in a higher bracket than usual, it's more valuable because the deduction is offsetting income that would otherwise be taxed at a higher rate.
Here's what's available in 2026 depending on your situation:
401(k) and 403(b): The contribution limit in 2026 is $24,500.
If you're 50 or older, you can add a catch-up contribution of $8,000, bringing the total to $32,500. And if you're between 60 and 63, a new enhanced catch-up provision allows an even larger contribution, up to $11,250 instead of $8,000, for a total of $35,750.
If you're a business owner with a Solo 401(k), the limits are significantly higher when you factor in employer contributions.
IRA: The contribution limit in 2026 is $7,500, or $8,600 if you're 50 or older.
Income limits apply for deductible contributions depending on whether you or your spouse has access to a workplace retirement plan, worth checking if you're not sure where you land.
HSA: If you're enrolled in a high-deductible health plan, an HSA contribution is one of the only triple-tax-advantaged moves available: the contribution is deductible, the growth is tax-free, and withdrawals for qualified medical expenses are tax-free. The 2026 limit is $4,400 for individual coverage and $8,750 for family coverage, with an additional $1,000 catch-up if you're 55 or older.
SEP-IRA or Solo 401(k) for business owners: If you own a business, the contribution limits are substantially higher.
A SEP-IRA allows contributions up to 25% of net self-employment income, with a maximum of $72,000 (or $80,000, if over 50) in 2026.
A Solo 401(k) has similar overall limits but also allows the employee catch-up contributions mentioned above, which often makes it the better choice for owners who want to maximize contributions.
The caveat worth stating clearly: this strategy requires that you have the cash flow to actually increase contributions and still cover your living expenses. It also requires that you haven't already maxed out these accounts for the year. But if you have room and the income to support it, a high-income year is the single best time to use it.
3. Time When The Income Hits (If You Still Can)
This one requires the most foresight, which is why it belongs at the beginning of the year rather than the end.
But if you're reading this and you have some control over the timing of the income event, it may still be relevant.
Not all income has to be recognized the moment a sale closes. Depending on the type of transaction, there are sometimes legitimate options for structuring when income is received.
Installment sales:
If you're selling a business or real estate to a private buyer, rather than receiving the full purchase price in one lump sum, you can structure the sale so payments come over multiple years. Each payment is taxable when received — which means the income gets spread across years instead of all hitting at once. This doesn't reduce the total tax you pay, but it can keep you out of the highest brackets in any single year, which matters more than people realize.
Deferred compensation and timing of distributions:
If you're still working and have control over when bonuses, commissions, or other variable income are paid, there can be value in thinking carefully about which tax year they land in. This requires actual flexibility in your employment arrangement; not everyone has it, but it's worth knowing it exists.
Waiting altogether:
Sometimes the best move is simply not adding more taxable events to an already expensive year.
If your income is elevated this year because of higher employment earnings, a bonus, or some other one-time event, and you were also planning to sell a rental property or liquidate a large brokerage position, it may be worth asking whether that sale has to happen this year.
Pushing a capital gains event into the following year, when your income returns to normal, can mean the difference between paying 15% and 20% on those gains, or between staying in your current bracket and getting bumped into the next one. It won't always be feasible. But if the timing is flexible, it's one of the simplest ways to reduce the overall tax hit.
The limits of this: If you've already sold and the money is in your account, income timing is off the table. This one is more for people who are in the planning phase, not the aftermath phase. Which is exactly the point: the earlier you're thinking about a big income year, the more options you have.
A Note on What Not to Do
Unless there is a compelling reason to do otherwise, large Roth conversions are often better reserved for lower-income years, rather than years in which income is already elevated.
Roth conversions are a popular and powerful early retirement tax planning strategy.
However, converting pre-tax retirement money to Roth adds taxable income in the year of conversion, which you want to do in low-income years to pay tax at a lower rate.
In a year where your income is already elevated from a sale or windfall, you're likely already in a high bracket.
Adding conversion income on top of that usually means paying more tax on the conversion than you would have in a normal year, the opposite of what you're trying to accomplish.
If Roth conversions are part of your long-term plan, the years after a big income year, particularly if you're retiring soon and income drops, are often the better window.
The Bigger Point
None of these strategies requires you to do anything unusual or risky.
A DAF is a simple account. Increasing retirement contributions is a normal financial move. Income timing is just thoughtful structuring.
One more thing worth a brief mention: tax-loss harvesting.
This involves selling investments in your non-retirement accounts that are currently at a loss to offset gains elsewhere. This is another popular and legitimate tool in a high-income year, too.
The honest caveat is that after several years of strong market performance, most portfolios don't have many positions sitting at a meaningful loss. If you hold individual stocks rather than just funds, there may be more opportunity, especially if there are positions you've been meaning to exit anyway. Worth a look, but it's not the first place to focus.
What all of these strategies have in common is that they require someone to be looking at the full picture!
While there are situations where paying the tax is unavoidable, there are often several strategies that can help minimize the damage and improve the overall outcome.
Have any questions about what you’ve read? Let’s talk about them!
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