Why multiyear tax planning matters

Multiyear tax planning looks beyond a single tax return to manage taxes over several years. In my practice I’ve seen clients—freelancers, small-business owners, executives with concentrated equity, and those approaching liquidity events—save materially when they plan across years instead of reacting at year-end. The goal is to “smooth” taxable income so you don’t unexpectedly jump into a higher marginal bracket, lose phaseouts for credits or deductions, or trigger higher Medicare premiums and Net Investment Income Tax (NIIT).

This article explains practical strategies, timelines, and pitfalls, with links to authoritative guidance so you can follow up with your tax advisor (IRS, Treasury, CFPB cited where relevant).

A step-by-step framework for multiyear smoothing

  1. Project taxable income for at least 3 years
  • Build a simple forecast that includes expected wages, bonuses, self-employment income, capital gains, retirement distributions, and other taxable events. Include likely changes such as a job change, business sale, or major medical expense. Forecasts don’t need to be perfect—accuracy within a range is still valuable.
  1. Identify tax “bump points” and phaseouts
  • Locate thresholds that change tax behavior: marginal tax-bracket edges, the start of the NIIT, thresholds for Medicare Part B/D IRMAA surcharges, loss of itemized deductions or child tax credit phaseouts, and state income-tax brackets. These trigger points tell you where smoothing will matter most.
  1. Choose smoothing tactics based on your situation

  • Defer or accelerate income where possible: ask employers about bonus timing, invoice clients earlier or later, or elect certain payment schedules. For small businesses, consider shifting income recognition (cash vs. accrual) only after consulting your CPA.

  • Accelerate or shift deductible spending: prepay deductible expenses (business supplies, qualified medical costs, or state taxes within limits) in high-income years and defer them into low-income years.

  • Use retirement accounts: maximize pre-tax retirement contributions (401(k), SEP, traditional IRA where eligible) in high-income years to lower taxable income now (see IRS guidance on retirement accounts: https://www.irs.gov/retirement-plans).

  • Use tax-advantaged accounts: fund HSAs (see IRS Publication 969: https://www.irs.gov/publications/p969) in high-cost years for an immediate deduction, or plan FSA/HSA timing around anticipated medical expenses.

  • Capital gains timing and harvesting: realize capital gains in low-income years where your long-term capital gains tax rate may be 0% or lower (IRS Topic on capital gains: https://www.irs.gov/taxtopics/tc409). Conversely, use tax-loss harvesting to offset gains.

  • Consider installment sales or structured payouts for business exits. Spreading proceeds over multiple years can keep you in lower brackets and reduce the top-line tax hit.

  • Leverage business deductions and credits: use Section 179 or bonus depreciation strategically for equipment purchases in years when they provide the most tax benefit (Section 179 details: https://www.irs.gov/businesses/small-businesses-self-employed/section-179-deduction).

  1. Coordinate with state taxes and other programs
  1. Reassess annually and after major life events
  • Tax law, income, and family circumstances change. Review your plan each year and after significant events such as marriage, sale of a business, or an unexpected windfall.

Common real-world strategies (and when they make sense)

  • Bonus timing: If your employer will pay a large year-end bonus, ask whether it can be pushed to January if that keeps you below a bracket threshold.

  • Retirement deferrals and Roth conversions: In a high-income year, you may prefer pre-tax deferrals; in a low-income year, consider Roth conversions when the incremental tax rate is low. The value of Roth moves depends on projected future tax rates (IRS retirement pages: https://www.irs.gov/retirement-plans).

  • Capital gains in low-income years: Realize gains in a year when your ordinary income is low enough that long-term gains are taxed at 0% or 15% instead of 20%—this reduces total tax on the sale.

  • Accelerating deductions: For businesses with predictable expenses, accelerating a deductible purchase (or electing to take a Section 179 expense) in a high-income year can materially reduce taxable income for that year.

  • Installment sales and 1031-like strategies: For property or business sales, spreading income or using qualified exchanges can defer or change the timing of tax recognition.

Examples (concise, practical)

Example 1 — Freelance consultant

  • Baseline: normally $90k/year; big one-off project pushes year to $200k.

  • Plan: accelerate IRA/SEP contributions and defer invoice receipts until the following year where possible. Harvest capital losses to offset gains and evaluate whether some project payment can be moved to January. Result: taxable income reduced enough to avoid moving into a much higher marginal bracket.

Example 2 — Small business with equipment need

Pitfalls and risks to watch for

  • Timing risk: Tax deferrals push tax bills forward. If tax rates rise, a deferred tax may cost more later.

  • Cash-flow mismatch: If you defer income for tax reasons but need cash, the tradeoff can be painful. Always balance tax strategy with liquidity needs.

  • Code compliance: Aggressive shifts (e.g., improper income shifting, misusing entity election rules) can trigger IRS scrutiny. Always document business purpose and consult your CPA.

  • State tax surprises: Moving income across years may trigger different state tax treatments or residency tests.

When to involve a professional

  • Complex equity compensation, business sales, large capital events, or multistate issues almost always benefit from a tax pro and often a financial planner. In my practice, coordinating a CPA and an advisor early—at the planning stage—averts rushed, costly moves at year-end.

Tools and worksheets to use

  • Three-year income forecast spreadsheet that includes ordinary income, capital gains, and itemized deductions.

  • A checklist for high-income years: estimate AGI, map phaseouts, mark bracket thresholds, and list possible timing moves.

  • Ask your CPA for scenario modeling—many firms will run 2–3 projections showing tax impact across different timing choices.

Related FinHelp resources

Quick checklist before year-end

  • Forecast your expected AGI and taxable income for the current and next year.
  • Identify any bracket or phaseout thresholds you might cross.
  • Review retirement and HSA contribution limits and fund if helpful (see IRS guidance: https://www.irs.gov/retirement-plans and https://www.irs.gov/publications/p969).
  • Coordinate with your CPA on possible income timing (bonuses, invoices, sales) and deductible acceleration.
  • Confirm state tax treatment if you’ve moved or plan to move.

Professional disclaimer

This article is educational and does not replace personalized tax advice. Tax law and IRS guidance change; consult a qualified CPA or tax attorney who can review your full financial picture before making multiyear decisions. Authoritative sources used include the IRS and federal agencies cited above (IRS: https://www.irs.gov; U.S. Department of the Treasury: https://home.treasury.gov; Consumer Financial Protection Bureau: https://www.consumerfinance.gov).

Final takeaway

Multiyear tax planning turns unpredictable or lumpy income into manageable outcomes by timing income, deductions, and taxable events. Start with a multi-year forecast, identify key thresholds, and coordinate moves with a tax pro—doing so can reduce your lifetime taxes and avoid costly surprises. Planning ahead is where the biggest, lowest-risk tax savings appear.