Individual Tax Planning Strategies

Why this topic matters

Tax Compliance and Planning (TCP) goes beyond computing tax to minimizing it legally. Area I — Tax Compliance and Planning for Individuals and Personal Financial Planning — is the largest area of the section. Questions give a taxpayer's situation and ask which strategy produces the best after-tax result. The One Big Beautiful Bill Act (OBBBA) of July 2025 made most individual provisions permanent, so long-term planning is more predictable. Figures are for tax year 2026 unless stated.

Core planning principles

• Timing: defer income and accelerate deductions (or the reverse when rates are expected to rise).
• Character: convert ordinary income into long-term capital gain or qualified dividends taxed at 0%, 15%, or 20%.
• Shifting: move income to lower-bracket family members — within the limits of the kiddie tax and assignment-of-income rules.
• Exclusion and deferral vehicles: retirement plans, health savings accounts (HSAs), Section 529 plans, municipal bonds.
• Always compare marginal rates — the rate on the next dollar — not average rates.

Itemizing versus the standard deduction

• With a high standard deduction ($16,100 single, $32,200 joint in 2026), many taxpayers don't itemize. Bunching deductions — for example, two years of charitable gifts in one year — can push itemized deductions above the standard deduction every other year.
• A donor-advised fund allows a large deductible contribution in one year while grants to charities are made over several years.
• From 2026, only charitable gifts above 0.5% of adjusted gross income (AGI) are deductible for itemizers, which slightly favors bunching; non-itemizers can deduct up to $1,000 ($2,000 joint) of cash gifts to public charities.
• Taxpayers in the 37% bracket get at most about 35% value from itemized deductions from 2026.

Charitable strategies

• Give appreciated long-term capital gain property (stock held more than a year) instead of cash: deduct fair market value (up to 30% of AGI for public charities) and never pay tax on the gain.
• Sell loss property and donate the cash, so the capital loss is deductible.
• Qualified charitable distributions from individual retirement accounts (IRAs) at age 70½ or older are excluded from income (and count toward required distributions) — valuable for those who don't itemize.
• Charitable remainder and lead trusts provide income streams with a current deduction.

Investment income strategies

• Tax-loss harvesting: realize losses to offset gains (and up to $3,000 of ordinary income), avoiding the wash sale rule (no substantially identical purchase within 30 days before or after).
• Hold for long-term treatment (more than one year); in low-income years, realize gains in the 0% bracket (up to $49,450 single / $98,900 joint of taxable income in 2026).
• Asset location: hold tax-inefficient assets (taxable bonds, high-turnover funds) in tax-deferred accounts, and tax-efficient assets (index funds, municipal bonds) in taxable accounts.
• The net investment income tax (3.8%) applies above $200,000 / $250,000 of modified AGI — manage the timing of gains and consider tax-exempt income.
• Qualified small business stock held long enough can exclude 50%–100% of gain (tiered for stock issued after July 4, 2025).

Using the new OBBBA deductions (2025–2028)

• The tips ($25,000), overtime ($12,500 / $25,000), senior ($6,000 per person aged 65+), and new car loan interest ($10,000) deductions phase out with modified AGI. Planning around the phase-out ranges — for example, by making deductible retirement contributions to lower modified AGI — can preserve them.
• The state and local tax cap is $40,400 in 2026 but phases down to $10,000 above $505,000 of modified AGI; high earners near that threshold benefit from reducing modified AGI. Owners of pass-through businesses may use state pass-through entity taxes, which are deductible at the entity level and avoid the individual cap.

Family income shifting and education

• The kiddie tax taxes a child's unearned income above a small threshold at the parents' rate — earned income (a real job in the family business, at reasonable pay) is not subject to it.
• Section 529 plans: tax-free growth and withdrawals for qualified education (including up to $10,000 of K–12 tuition annually, rising to $20,000 from 2026 under OBBBA, and expanded K–12 expenses); unused funds can move to a beneficiary's Roth IRA (lifetime limit $35,000). Contributions can be front-loaded using five years of annual gift exclusions.
• Education credits: the American Opportunity credit (up to $2,500 per student) versus Lifetime Learning (up to $2,000 per return) — the same expenses can't be used for both or for tax-free 529 withdrawals.

Timing and other strategies

• Roth conversions in low-income years lock in low rates for future tax-free growth.
• Estimated tax safe harbors: pay 100% of the prior year's tax (110% if prior-year AGI exceeded $150,000) to avoid penalties when income is uneven.
• Home sale exclusion: time sales to meet the 2-out-of-5-year ownership and use tests ($250,000 / $500,000 exclusion).
• Filing status comparisons: married filing separately is rarely better, except to limit liability or for income-driven student loan repayment.

How it is tested

• Choose between strategies and compute the after-tax benefit.
• Apply bunching, donor-advised funds, and qualified charitable distributions.
• Plan capital gains and losses, including the 0% bracket and wash sales.
• Use 529 plans and education credits efficiently.