Should You Defer Income Into Next Year?

Sometimes yes, sometimes no. The deciding factor is whether the income will land in the same or a lower tax bracket next year. Deferral is a timing decision, not a tax-elimination trick. The income still gets taxed, just later. If next year's bracket looks the same or lower, deferring can make sense. If next year's bracket looks higher, deferring can cost more than it saves.

What does it actually mean to defer income into next year?
When does deferring income actually make sense?
What are the common ways business owners defer income?
What retirement and benefit contributions lower taxable income without deferring it?
How do stock options and deferred compensation plans change the timing picture?
What are the risks of deferring income?
How do you decide, and who should you talk to?
Key Takeaways
References

What does it actually mean to defer income into next year?

Deferring income means postponing receipt of certain income until after December 31, so it becomes taxable in the next calendar year rather than the current one. The calendar year boundary is what matters, not the fiscal year of the business.

For employees, deferral may involve asking for a year-end bonus to be paid in January instead of December. For small business owners or self-employed individuals, deferral might mean delaying invoices or holding off on finalizing new contracts to shift income into the next tax year, according to Gregory Ricks.

Deferral is not tax avoidance. The tax is postponed, not erased. The income will be reported and taxed in the following year. The question is only whether that timing produces a better result than recognizing the income now.

When does deferring income actually make sense?

The core test is simple: deferral makes sense when you expect to be in the same tax bracket or a lower one next year, according to Gregory Ricks and Financial Partners Group.

Deferral is most valuable when current rates are high and are not expected to rise further. The Financial Planning Association notes that deferral when rates are very high makes sense almost no matter what, provided rates do not go higher.

If income is expected to jump significantly next year, the benefit can disappear or reverse. A deferral that pushes next year's income into a higher bracket can cost more than it saved. Tax rates and brackets are set by legislation and can change, so the comparison is a projection, not a guarantee.

What are the common ways business owners defer income?

Business owners commonly defer income by delaying invoicing or finalizing contracts near year end to shift revenue into the next year, according to Gregory Ricks. The mechanics are straightforward: hold the invoice, recognize the revenue later.

Non-qualified deferred compensation, or NQDC, is another route. In an NQDC plan, the employee does not recognize taxable income at the point of commitment. The deferred portion of pay is not subject to income taxes in the year deferred, but Social Security and Medicare taxes are still paid on it, according to Key Private Bank.

NQDC plans carry real trade-offs. Participants cannot take loans from the plan and cannot roll the money into an IRA or other retirement account once paid out. The deferred compensation remains the employer's general asset and is subject to potential loss, according to Key Private Bank.

Deferral elections for NQDC generally must be made in the calendar year before the income is earned, and federal rules limit the ability to modify payout later, according to Aspiriant.

What retirement and benefit contributions lower taxable income without deferring it?

Retirement and benefit contributions reduce taxable income in the current year without pushing income into a later year. A traditional IRA contribution limit of $7,500 for 2026 is cited, with the $7,000 limit subject to annual inflation adjustment in $500 increments, according to Key Private Bank.

Individuals age 50 or older can make additional catch-up IRA contributions of up to $1,100, also eligible for inflation adjustments in $500 annual increments. A spousal IRA allows a contributor to contribute up to the annual limit on a spouse's behalf, according to Key Private Bank.

HSA contributions are pre-tax, either tax-deductible if contributed directly or excluded from income if contributed by an employer. HSA accounts accumulate and grow tax free as long as funds are used for qualifying medical expenses, according to Key Private Bank.

IRA deductibility depends on income thresholds and whether you have a workplace plan. Confirm eligibility for the current tax year before relying on a deduction.

How do stock options and deferred compensation plans change the timing picture?

Stock options and deferred compensation plans create timing outcomes that differ from ordinary income deferral. Incentive stock options, or ISOs, generate no taxable income when the option is exercised. Taxable income or gain is recognized only when a disposition occurs, according to Key Private Bank.

Non-qualified stock options, or NQSOs, have no income tax consequences when granted. Compensation income is recognized at vesting and exercise on the excess of fair value over option cost, according to Key Private Bank.

Annuity interest is taxed at ordinary income rates during distribution. Life insurance cash value grows tax deferred until withdrawn or distributed, and death benefits can be paid to beneficiaries free of income tax, according to Key Private Bank.

Holding period rules and plan documents drive the actual timing. Confirm the specifics for your situation before relying on any general rule.

What are the risks of deferring income?

The biggest risk is that the bracket assumption turns out to be wrong. Income that rises next year can push you into a higher bracket and cost more than deferring saved, according to Gregory Ricks.

Legislative risk is real. Future rates and rules can change, and deferral locks in exposure to whatever the law becomes, according to the Financial Planning Association.

NQDC deferrals carry a specific risk. The deferred amount is an unsecured employer obligation and can be lost if the employer runs into financial trouble, according to Key Private Bank.

Deferral can also affect eligibility for deductions and credits tied to adjusted gross income in the year the income lands. A larger income year can phase out benefits that a smaller income year would have preserved.

How do you decide, and who should you talk to?

Start by projecting this year's taxable income, then project next year's. Compare the brackets. If next year looks the same or lower, deferral may help. If next year looks higher, deferral may hurt. Then weigh the risks: bracket assumptions, legislative change, and the specific terms of any deferred compensation arrangement.

Multi-state businesses add a layer. State tax rates and nexus rules can change the math on where and when income is taxed. Spencer Accounting Group's Sales Tax Resolution service untangles complex multi-state sales tax liabilities, including nexus review, exposure quantification, voluntary disclosure, and getting current with each state.

For owners who want the position designed before year end rather than discovered in April, Spencer Accounting Group's Strategic Tax Planning service builds forward-looking planning around where the business is heading. Spencer Accounting Group is 100% virtual and works with clients in any state, so no office visit is involved.

This article is general information, not tax advice for a specific situation. Book a consultation to see if it is a fit.

Key Takeaways

Deferring income means postponing receipt past December 31 so it is taxed in the next calendar year, not eliminating the tax.
Deferral generally makes sense only if you expect to be in the same tax bracket or a lower one next year.
If income is expected to rise significantly next year, deferring can cost more than it saves.
NQDC deferrals escape income tax in the year deferred but still owe Social Security and Medicare tax.
The 2026 traditional IRA limit is $7,500, with a $1,100 catch-up for those 50 and older, both subject to inflation adjustment.
NQDC deferral elections generally must be made in the calendar year before the income is earned, and payout changes are federally restricted.
Tax rates and brackets can change by legislation, so any deferral decision is a projection rather than a certainty.