As the end of the year approaches, so too does the time for end-of-year tax planning, a time typically filled with strategies that minimize income, maximize deductions, and generally try to ensure that the least amount of taxes possible are paid and that any taxes due are pushed as far out into the future as possible.
In the past, a minimize-and-defer-income approach has been rather effective. But in today's tax environment, with more tax brackets, higher top rates, and a myriad of additional phaseouts and surtaxes that can drive marginal tax rates even higher for both ordinary income and long-term capital gains, the reality is that just pushing income indefinitely into the future is not necessarily the best strategy anymore. Instead, deferring too much income into the future may simply mean that when it's finally time to liquidate - whether it's selling highly appreciated investment positions for retirement income, or beginning withdrawals (or facing RMDs) from large IRAs - income at the time can rise so high that tax rates skyrocket!
As a result, it turns out that in today's environment, it may be far more effective to consider strategies like Roth conversions or capital gains harvesting that aim to accelerate income into the current year, rather than defer it into the future. This form of "tax bracket arbitrage" - creating wealth by reporting income when tax rates will be lower, even if it's now - can actually result in greater lifetime wealth, even though it triggers a tax liability sooner rather than later! In other words, it turns out that sometimes the best way to save on taxes is to pay them as soon as possible, even if it means creating income before the end of the year in order to do so!