In the midst of a competitive job market and potential financial challenges in the upcoming year 2024, experts are suggesting strategic tax planning as a silver lining for individuals facing lower income levels. Despite the difficulties of prolonged unemployment, there are opportunities to leverage temporary tax benefits that could lead to significant savings in the long run.
Exploring Tax Planning Opportunities
Certified financial planner Jaime Quinones highlights the potential for individuals experiencing a job layoff to benefit from a lower federal income tax bracket in the future. A few months without regular income can contribute to a decrease in the 2024 tax bracket, offering a window for tax planning strategies. This situation presents an opportunity to identify tax-saving options for the upcoming year.
Roth IRA Conversions as a Strategy
One of the strategies recommended by experts in lower-income years is Roth individual retirement account conversions. This process involves transferring pretax or nondeductible IRA funds to a Roth IRA, potentially leading to tax-free growth and future tax-free distributions. Although taxes are still applicable on the converted balance, being in a lower tax bracket can reduce the tax liability, making the conversion an attractive option for maximizing tax benefits.
It’s essential to note that decisions regarding tax strategies do not need to be immediate. Waiting until the end of the year approaches allows individuals to have a clearer understanding of their projected income for 2024. This approach enables better decision-making when it comes to leveraging tax-saving opportunities effectively.
For individuals with taxable income below certain thresholds, such as $47,025 for single filers and $94,050 for married couples filing jointly, the 0% long-term capital gains tax bracket can be advantageous. It provides an opportunity to rebalance a taxable portfolio or save on future taxes by taking advantage of the wide range of this bracket. Resetting an asset’s purchase price through selling and repurchasing can lead to significant tax savings in terms of future capital gains.
Before engaging in strategies like harvesting gains or taking advantage of the 0% bracket, it’s crucial to run projections of the 2024 taxable income. Long-term plans for assets, such as leaving them to heirs, should also be factored into the decision-making process. Certain strategies may not be beneficial for assets that will receive a stepped-up basis upon inheritance, as they will automatically reset the asset’s value for tax purposes.
Strategic tax planning in lower income years can provide individuals with opportunities to maximize tax savings and secure their financial future. By leveraging options such as Roth IRA conversions and the 0% long-term capital gains tax bracket, individuals can make informed decisions to minimize their tax liabilities and optimize their financial portfolios. Planning ahead and consulting with financial experts can help individuals navigate complex tax scenarios and make the most of potential tax benefits in challenging economic times.