In a challenging job market, some applicants are encountering fierce competition. However, despite the difficulties, experts suggest that prolonged unemployment and reduced income in 2024 could provide opportunities for tax planning. Certified financial planner Jaime Quinones of Stockade Wealth Management in Marlboro, New Jersey, points out that a job layoff can lead to a temporary decrease in the federal income tax bracket, opening up avenues for future tax savings. Even a few months without a regular income could significantly impact your 2024 tax bracket, creating possibilities for strategic tax planning.
One tax planning strategy that becomes more attractive during a lower-income year is Roth individual retirement account (IRA) conversions. Wealth advisor Catalina Franco-Cicero from Tobias Financial Advisors in Plantation, Florida, explains that these conversions involve transferring pretax or nondeductible IRA funds to a Roth IRA. While you will still owe regular income taxes on the converted balance, being in a lower tax bracket could mean a reduced tax liability. Investing in a Roth IRA can offer tax-free growth and future tax-free distributions, making it a valuable long-term tax planning tool.
If you find yourself in a position of lower income for 2024, you may be able to leverage the 0% long-term capital gains tax bracket to your advantage. Single filers with taxable income of $47,025 or less and married couples filing jointly with $94,050 or less may qualify for this beneficial tax rate. This wide tax bracket provides an opportunity to rebalance your investment portfolio or save on future taxes. By selling assets and immediately repurchasing them, you can reset the asset’s purchase price or “basis,” potentially reducing future capital gains taxes. However, it is crucial to assess your taxable income projections for 2024 before engaging in any gains harvesting strategy.
Consideration for Heirs and Long-Term Planning
While tax planning strategies like resetting asset basis can be advantageous for optimizing tax efficiency, it is essential to evaluate the long-term implications of your decisions. For assets intended to be passed down to heirs, the stepped-up basis upon inheritance may make the gains harvesting strategy unnecessary. Understanding the implications of your tax planning choices within the context of your overall financial objectives is key to making informed decisions.
Amid economic uncertainty and fluctuating income levels, strategic tax planning can provide a valuable opportunity to optimize your tax liability and prepare for future financial stability. By leveraging lower income years for Roth IRA conversions, exploring the benefits of the 0% long-term capital gains tax bracket, and considering the long-term implications of your tax planning decisions, you can effectively navigate the complexities of the tax system and secure your financial wellbeing. Consulting with a financial advisor or tax professional can help you develop a customized tax planning strategy tailored to your unique circumstances and goals.
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