It's possible to have too much tax deferral. Here are some tax-smart moves to make instead.
Conventional wisdom says that taking steps to defer your current individual federal income bill is almost always a good idea. True, if you expect to be in the same or lower tax bracket in future years, and you turn out to be right about that.
If you’re not a small business owner, you can defer taxable income by prepaying expenses that give rise to higher itemized deductions, maxing out on retirement plan contributions at work, making installment sales of property, and arranging for like-kind exchanges of real estate while you still can. Higher-income individuals can be hit with the additional 0.9% Medicare tax on part of their wages and/or net self-employment income.
The Biden plan would raise the top federal income tax rate for individuals from 37% to 39.6%, reportedly for single filers with taxable income above about $450,000 and married joint-filers with taxable income above about $500,000. Converting a traditional IRA into a Roth account effectively allows you to prepay your IRA federal income tax bill on the current IRA account balance at today’s low rates instead of paying higher future rates on the current account balance and future account earnings.
HSA contributions are deductible and withdrawals are federal-income-tax-free when used to cover qualified medical expenses. So, HSAs offer outright tax avoidance, as opposed to tax deferral. For 2021, qualifying policies can have out-of-pocket maximums of up to $7,000 for self-only coverage or $14,000 for family coverage.
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