The Year With No W-2

The year after a business sale has a peculiar quality. The closing binder is on a shelf somewhere. The earnout, if there is one, hasn't started accruing in any material way. The W-2 that structured the previous two decades has gone silent. For the first time in adult memory, taxable ordinary income may run closer to a retiree's than an executive's.

Most post-exit founders treat this year as a recovery period — a beat between the last chapter and the next. The calendar, however, treats it differently. The IRS treats it differently. And so do a handful of adjacent systems — Medicare's income-linked premiums, the Affordable Care Act's subsidy cliff, state residency clocks — that read a gap year as a data point with consequences that won't surface until two calendar pages later.

Which makes this a year to plan through, not around.

The year that doesn't look like the others

For most of a career, the W-2 is the dominant feature of the tax return. It sets the top marginal rate, determines the withholding rhythm, and anchors nearly every other planning decision around it. Bonuses, deferred compensation, retirement contributions, charitable timing — all of it orbits a known number that arrives in predictable increments twelve months at a time.

After a sale, that anchor is gone. The K-1 from the business, which may have been generating six- or seven-figure ordinary income for years, goes silent or produces a final stub. Salary ends on the closing date. The earnout, if the deal has one, has often been structured to deliver later, and sometimes in capital form rather than ordinary. For a substantial portion of the calendar year following close, there is no systematic ordinary-income inflow at all.

What remains is interest from the sale proceeds parked in short-term Treasuries, dividends from whatever portfolio existed before, and whatever capital gains have been deliberately realized. In a year of deliberate inaction — which is how most post-exit founders describe the first year after a sale — taxable ordinary income can run in the low six figures or below. A founder whose last three returns showed ordinary income around $800,000 may find themselves looking at a projected return that would have once belonged to a comfortable retiree.

The instinct is to treat this as a breather. The tax code treats it as a question.

Brackets you can finally reach into

The 24% federal bracket runs through $201,775 of taxable income for a single filer and $403,550 for a married couple filing jointly. The 32% bracket runs from there to $256,225 and $512,450 respectively. For anyone who has spent the last decade comfortably in the 35% or 37% bracket, these mid-level rates have been theoretical — visible on the schedule but not useful, because they sat below the floor set by the W-2 and the K-1.

In a gap year, they become accessible. And because the One Big Beautiful Bill Act made the underlying Tax Cuts and Jobs Act rate schedule permanent — the 2026 rate sunset did not happen — the bracket math is no longer running against a legislative clock. A conversion executed this year at 24% cannot be rendered retroactively expensive by the return of a 28% rate in 2027.

What typically moves through these brackets is a Roth conversion: an amount moved from a traditional IRA, or less commonly a 401(k) still held with a former employer, into a Roth account. The mechanics are unremarkable. Pay ordinary income tax on the conversion amount now. Watch the Roth grow untaxed thereafter, with no required distributions during the owner's lifetime. The arithmetic, however, depends entirely on where the conversion is placed relative to other income in the same year. An extra $100,000 converted against a $60,000 base of ordinary income is a 22%-and-24% event. The same $100,000 converted against a $180,000 base is a 24%-and-32% event. The conversions look identical on the statement. The after-tax result differs by several thousand dollars.

The question a post-exit founder asks, then, is not whether to convert. For someone with a seven- or eight-figure pre-tax balance staring down eventual required minimum distributions, the answer to whether is almost always yes, in some amount. The question is how much this year — and the answer depends on what else is in the return.

What one converted dollar actually costs

Consider a married couple in a no-income-tax state, both age 58, with roughly $80,000 of dividend and interest income projected for the year — the sort of passive return a large Treasury ladder and a modest equity portfolio might produce. No wages. No K-1. Standard deduction assumed.

At this base, taxable income is roughly $48,000 — comfortably in the 12% bracket, with substantial room in the 22% and 24% brackets before any painful rate applies. Converting $150,000 from a traditional IRA pushes taxable income to about $198,000. The incremental federal tax on that conversion lands somewhere near $30,000 — a blended rate in the low 20s, because the conversion straddles the 12%, 22%, and 24% brackets. The 3.8% net investment income surtax does not apply directly to the converted amount itself, since a Roth conversion is ordinary income rather than investment income. It may, however, push MAGI above the $250,000 joint threshold and thereby expose the $80,000 of interest and dividends to the surtax — an adjacent cost of roughly $3,000 in this illustration.

Change one variable. Move the same couple to California, where ordinary income can be taxed up to 13.3% at the state level with no preferential treatment for conversion income. The same $150,000 conversion, layered on the same $80,000 base, now carries an all-in cost closer to $45,000 — roughly 30% of the converted amount.

Change another. Make the filer single rather than joint. The brackets compress. The 24% ceiling arrives at about half the joint threshold. The same conversion now crosses into the 32% bracket for its last tranche.

None of these figures are recommendations. They are illustrations of why the question "should I do a Roth conversion this year" cannot be answered without a projected return in hand. The same converted dollar can cost roughly 22 cents or roughly 35 cents depending on filing status, state of residence, and what else is in the year. A gap year makes the lower end of that range accessible. Nothing about the gap year guarantees access to it.

The two-year echo

For founders approaching Medicare, the bracket math is not the only math. Medicare Part B and Part D premiums are income-adjusted above modest thresholds — $109,000 of MAGI for a single filer, $218,000 for joint filers, as of 2026 — through the income-related monthly adjustment amount, or IRMAA. The adjustment is cliff-structured. One dollar over a tier threshold triggers the full surcharge for the year. A joint filer whose MAGI lands at $218,001 pays roughly $975 more per person in annual Part B premiums than the same filer at $217,999, along with a smaller Part D surcharge.

Two features of the system deserve specific attention in a gap-year context.

The first is the two-year lookback. The MAGI that determines Medicare premiums in a given year is the MAGI from two tax years prior. A conversion done in the year a founder turns 63 shows up as a surcharge at 65, the year Medicare eligibility begins. A conversion done at 64 shows up at 66. The surcharge then falls off the following year, provided income has returned to a lower band. For the window in which it applies, it is a real additional cost that has to be priced into the conversion arithmetic.

The second is the appeal path. Form SSA-44 allows a beneficiary to request that the Social Security Administration use a more recent income year than the statutory two-year lookback when a qualifying life-changing event has substantially reduced income. Work stoppage — which describes the year after a business sale with unusual precision — is among the qualifying events. The appeal is not automatic and depends on documentation, but it is among the most underutilized tools in the post-exit planning kit. Founders whose 2024 return reflected a sale, and whose 2026 income looks nothing like it, may be paying IRMAA premiums they can legitimately reduce.

A quieter feature, worth naming: IRMAA is calculated individually once a spouse has died. A joint filer in Tier 1 at $220,000 of MAGI becomes a single filer facing the same tier at $110,000 of income. This widow's-penalty effect is not specific to gap-year planning. But conversions timed for the joint years can reduce the traditional balance — and therefore the future required distributions — that would otherwise hit the surviving spouse at compressed single brackets. The compounding value of that trade is often underestimated.

The cliff before Medicare

For founders under 65, a different cliff sits in the way. Health coverage before Medicare, for those not on a spouse's employer plan or COBRA, typically comes through the ACA marketplace. The premium tax credit that makes that coverage affordable is tied to MAGI. As of the 2026 plan year, the subsidy cliff has returned.

The enhanced premium tax credits enacted under pandemic-era legislation — which smoothed the subsidy phase-out and preserved some credit for households above 400% of the federal poverty level — expired at the end of 2025. They were not extended in time for the 2026 plan year, though legislation that would reinstate them was pending at the time of writing. Absent further action, the pre-2021 structure applies: one dollar of MAGI above 400% of FPL means full loss of subsidy, with any advance payments clawed back at tax time.

The thresholds, using 2025 federal poverty guidelines, land at roughly $62,600 for a single person, $84,600 for a two-person household, and $128,600 for a family of four. For a 60-year-old couple on ACA coverage, a Roth conversion that pushes MAGI from $80,000 to $90,000 in pursuit of filling the 22% bracket may, on paper, cost $2,200 in federal tax — and, in consequence, well over $10,000 in lost premium subsidy, depending on the state and plan selected.

This changes the calculus. For a founder who will be on Medicare within a year or two, the cliff becomes a scheduling problem rather than a binary obstacle. A small conversion this year, a larger one once Medicare starts — assuming MAGI can be managed under the IRMAA tier that matters — often outperforms a single large conversion that triggers the subsidy cliff. For founders further from 65, the arithmetic may argue for postponing significant conversions until Medicare eligibility, or for accepting the lost subsidy as a priced-in cost of the strategy rather than a stumble into one.

What else is sitting in the same year

The gap year is rarely clean. A bracket-fill calculation that treats the year as pristine low-income will miss the other items usually sitting in the same return.

QSBS proceeds. If the sale qualified under §1202, a portion or all of the gain may have been federally excluded, though state treatment varies — California does not conform — and any non-excluded portion is taxed at a 28% federal rate.

Installment sale interest. If the deal was structured with §453 deferred payments above $5 million of gain, the §453A interest charge on the deferred tax is itself an ordinary-income add to the year.

Earnouts. An earnout tranche landing in Q4 can move a year's ordinary income by several hundred thousand dollars between October and December — after most of the conversion planning window has closed.

State residency clocks. A founder who changed domicile in the year or two before the sale is still inside the audit window of the former state in the gap year. California's Franchise Tax Board, in particular, is known to scrutinize sale-year returns for eighteen months or longer.

Each of these changes the answer to "how much should be converted this year." Three of the four interact in OBBBA-specific ways and are treated in more detail in the forthcoming dispatch on the law's practical effects.

When within the year matters

A related point, often missed: the Roth conversion question is better answered in November than in March. The advice to "fill the 24% bracket" is easy to give early in the year and surprisingly hard to execute early in the year, because the ceiling of the 24% bracket depends on every other line item on the return, most of which are not yet known in Q1.

Interest rates may change, changing Treasury income. A mutual fund may make an unexpected capital gain distribution in December. The earnout tranche may or may not land. A real estate investment may throw off a K-1 that wasn't modeled. By November, most of the year's income is either received or firmly projected. The remaining room in whichever bracket has been chosen as the ceiling can be calculated with small rather than large error bars.

The trade-off is logistical. Conversions done in December require reasonably prompt execution — the receiving custodian needs the request in time to process by year-end — and undoing an errant conversion, which was once possible through "recharacterization," has not been an option since 2018. A conversion in December is a conversion. It cannot be unwound the following April because the numbers came in differently than expected.

Two practices make the late-year window workable. First, projecting total income with conservative padding by early November, so the conversion amount can be set with a margin of safety against an unexpected late-year item. Second, managing the resulting tax liability through federal withholding on the conversion itself rather than through estimated payments. Withholding is treated as paid evenly through the year for safe-harbor purposes, even when withheld in December, which can eliminate underpayment penalties that quarterly estimates filed after the conversion would not.

Waiting to convert until the year is nearly visible is not procrastination. It is, for most post-exit founders, the informed move.

A question worth asking

If the answer matters, the question is worth asking well before the 1099s arrive:

"If my taxable ordinary income this year runs a fraction of what it was in any of the last five, which bracket am I allowed to fill — and what does the IRMAA math look like two Januarys from now?"

Where to look in your own numbers

Most of what this dispatch describes is, in the end, an interior planning exercise — projected income, bracket calculus, cliff awareness — that belongs inside an annual tax plan rather than on a website. No diagnostic can answer how much a particular reader should convert in a particular year. That answer lives in the return.

What a diagnostic can do is flag whether the question is live. Whether the ordinary-income valley is real. Whether the withdrawal-sequencing pieces of the gap year are likely sitting unattended alongside the conversion question. Whether the MAGI-sensitive systems are close enough to matter. Six questions, roughly four minutes.

Take the check →

A final observation. The accountant who prepares the return at year-end and the planner who builds the multi-year conversion schedule are often not the same person, and the handoff between them is not always clean. In a gap year — structurally rare, calendar-bounded, touching at least three other systems besides the federal return — this is a conversation worth having with both, and having early.

Source note: all federal tax, IRMAA, and ACA figures cited reflect 2026 law and 2026 plan-year thresholds. See Addendum A of the publication's factual reference (04-obbba-factual-reference.md) for table-level sources — IRS Rev. Proc. 2025-32 for bracket and NIIT figures, CMS's November 2025 IRMAA release, and CRS and IRS sources for ACA PTC structure — and for the note on pending legislative action affecting the ACA cliff.