I have a hard decision to make soon and that’s how much of my salary I will defer into the future. A key problem that comes with a higher income levels is higher and higher taxes. My employer allows me to defer my compensation into the future (at least 5 years) which has a net effect of reducing my W-2 income by whatever amount I defer. The deferred comp strategy is a great way to lower your tax base, save for a future expense or retirement, and lower taxes.
As it stands today, the tax rate are listed in the table below. Our incomes fluctuate anywhere from the 32% to 35% level but those tax rates will change in 2026.
| Status | Tax Rate | on taxable income from… | up to… |
|---|---|---|---|
| Single | 10% | 0 | 11000 |
| Single | 12% | 11001 | 44725 |
| Single | 22% | 44726 | 95375 |
| Single | 24% | 95376 | 182100 |
| Single | 32% | 182101 | 231250 |
| Single | 35% | 231251 | 578125 |
| Single | 37% | 578126 | Infinity |
| Married | 10% | 0 | 22000 |
| Married | 12% | 22001 | 89450 |
| Married | 22% | 89451 | 190750 |
| Married | 24% | 190751 | 364200 |
| Married | 32% | 364201 | 462500 |
| Married | 35% | 462501 | 693750 |
| Married | 37% | 693751 | Infinity |
| Head of Household | 10% | 0 | 15700 |
| Head of Household | 12% | 15701 | 59850 |
| Head of Household | 22% | 59851 | 95350 |
| Head of Household | 24% | 95351 | 182100 |
| Head of Household | 32% | 182101 | 231250 |
| Head of Household | 35% | 231251 | 578100 |
| Head of Household | 37% | 578101 | Infinity |
2026 Tax Rates
At the end of 2025 and assuming no changes to the tax code between now and then, we’ll be in a new higher tax paradigm.
| Status | Tax Rate | on taxable income from… | up to… |
|---|---|---|---|
| Single | 10% | 0 | 9325 |
| Single | 12% | 9326 | 37950 |
| Single | 25% | 37951 | 91900 |
| Single | 28% | 91901 | 191650 |
| Single | 33% | 191651 | 416700 |
| Single | 35% | 416701 | 418400 |
| Single | 39% | 418400 | Infinity |
| Married | 10% | 0 | 18650 |
| Married | 15% | 18651 | 75900 |
| Married | 25% | 75901 | 153101 |
| Married | 28% | 153101 | 233350 |
| Married | 33% | 233351 | 416700 |
| Married | 35% | 416701 | 470700 |
| Married | 39.6% | 470701 | Infinity |
| Head of Household | 10% | 0 | 13350 |
| Head of Household | 15% | 13351 | 50800 |
| Head of Household | 25% | 50801 | 131200 |
| Head of Household | 28% | 131201 | 212500 |
| Head of Household | 33% | 212501 | 416700 |
| Head of Household | 35% | 416701 | 444550 |
| Head of Household | 39.6% | 444550 | Infinity |
Our new base “minimum” tax rate will be 33% and it may get as high as 39.6% so the plan I’ve hatched to avoid the higher tax brackets is to defer my compensation into the future which eliminates my income.
The question is how much should I defer? 15 percent? 20 percent? 30 percent?
The tough thing is that our incomes are variable, we both have base salaries but also get bonuses depending how well our employer firms perform. Additionally, I get part of my pay in company stock shares and the price of those shares fluctuates daily.
Will the shares be worth more or less in 2025? If they are then I need to reduce more income, if the shares are lower then I won’t need to reduce as much.
How much income will our dividend stocks and how much interest will we earn on our money? These can be somewhat forecast but with the Fed changing interest rates those values may change too.
I should mention that once I commit to an amount, in terms of percentage, I can’t change it until the following year. I also can’t withdraw the money should an emergency arise or I change my mind.
Right now it’s looking like the optimum amount for me to defer is 25% but I would really like to do 30% to have a significant impact on lowering me down to the next lower run tax bracket of 24% (2024 tax rates). If that works well then I will have a good baseline for the 2026 tax rates.
Share The Wealth
Have you used deferred compensation as a strategy to lower taxes? Let me know in the comments below….