Spreading a Windfall: Tax Moves for a High-Income Year
What to do when a sale, a bonus, or an unusually good year pushes income into the top brackets — the deductions to pull forward, the income to push back, and the surtaxes to watch.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A high-income year — a business sale, a large contract, a bonus — is taxed at the top brackets plus the surtaxes that begin at $200,000 single or $250,000 joint. Planning shifts deductions into that year and income out of it: large retirement contributions, bunched charitable gifts, equipment placed in service, deferred billing, and installment or deferred-gain structures for sales.
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What moves deductions into the year?
| Move | Effect |
|---|---|
| Fund a cash balance or defined benefit plan | Deductions well above 401(k) limits for older owners, if the plan is adopted by the return due date, including extensions |
| Max the 401(k), SEP, or solo plan | Up to the annual limits; employer contributions through the extended due date |
| Bunch several years of charitable giving into a donor-advised fund | Deduct now, grant later; give appreciated stock to avoid gain; from 2026 itemizers deduct only gifts above 0.5 percent of AGI |
| Place equipment in service by December 31 | Section 179 or bonus depreciation |
| Prepay deductible expenses within the 12-month rule | Rent, insurance, subscriptions |
| Pay state entity-level tax before year-end | Deductible at the entity, outside the individual SALT cap ($40,400 for 2026, phasing down toward $10,000 above $505,000 of modified AGI) |
| Fund health savings accounts | Deductible, tax-free growth |
What pushes income out of the year?
- Installment sale of a business or property, spreading gain across the years of payment.
- Opportunity zone fund investment within 180 days of a gain — under the new program, an investment made after December 31, 2026 defers the gain for five years; one made in 2026 under the old program defers it only to December 31, 2026.
- 1031 exchange of real estate, deferring the whole gain when all proceeds go into like-kind real property.
- Deferring December billing to January for a cash-method business.
- Deferred compensation arrangements set up before the income is earned, following Section 409A.
- Splitting a sale across two tax years by closing date where the economics allow.
What does a spike trigger?
The 3.8 percent net investment income tax on investment income and passive gains; the 0.9 percent additional Medicare tax on wages and self-employment income; the qualified business income phase-out for service businesses (taxable income above $201,750, or $403,500 joint, for 2026); the phase-down of the SALT cap above $505,000 of modified AGI; the new 2026 limit that cuts itemized deductions by 2/37 once income reaches the 37 percent bracket ($640,600 of taxable income, or $768,700 joint), capping their value at 35 cents on the dollar; the alternative minimum tax exemption phase-out (from $500,000, or $1,000,000 joint); higher Medicare premiums two years later; and the loss of child and education credits with income limits. A projection in the third quarter shows which apply.
What should you not do?
Spend money only to create deductions; buy equipment you do not need; prepay beyond the 12-month rule; defer income into a year that will be just as high; or convert to a Roth in the spike year (a conversion belongs in a low year). And do not forget estimated taxes — the safe harbor based on last year's tax (110 percent of it if last year's AGI topped $150,000) avoids the penalty, but the balance is still due in April.
Frequently asked questions
Can I average income over several years?
Not in general; farm and fishing income averaging (Schedule J) is the main remaining election.
Should I take a smaller S corporation salary in the spike year?
Reasonable compensation does not drop because profit rose; a one-time spike may justify a bonus rather than a permanent raise.
Does moving to Florida before a sale help?
For state tax, yes, if domicile genuinely changes before the gain is recognized; the former state will examine the timing.
Is a charitable remainder trust worth it?
For a large appreciated asset the donor intends to give partly to charity, it spreads the gain over the trust's payments; for pure tax deferral it is rarely efficient.
Official sources
The IRS explains: “Under the cash method, you generally deduct expenses in the tax year in which you actually pay them.” — Internal Revenue Service, Publication 334 (2025), Tax Guide for Small Business, https://www.irs.gov/publications/p334
The IRS explains: “A 3.8 percent net investment income tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.” — Internal Revenue Service, Topic no. 559, Net investment income tax, https://www.irs.gov/taxtopics/tc559
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk runs a third-quarter projection the moment a windfall is in sight, while every move is still open. See pricing or book a free fit call.
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