In today’s competitive job market, many applicants are finding themselves facing tougher challenges when it comes to securing employment. However, despite the difficulties that come with prolonged unemployment, there may be a silver lining in the form of opportunities for tax planning. According to certified financial planner Jaime Quinones from Stockade Wealth Management, a temporary lower federal income tax bracket resulting from a job layoff could present avenues for future tax savings. Even just three to four months without regular income could significantly lower your 2024 tax bracket, providing a window for strategic tax planning.
One strategy that becomes more attractive in a lower-income year is Roth individual retirement account (IRA) conversions. This involves transferring pretax or nondeductible IRA funds to a Roth IRA, as explained by CFP Catalina Franco-Cicero from Tobias Financial Advisors. While this maneuver does not come without its tax implications, since regular income taxes will still be owed on the converted balance, the bill could be lower in a smaller tax bracket. Furthermore, converting funds to a Roth IRA offers the opportunity for tax-free growth and future tax-free distributions. It is a strategic move that can be beneficial in the long run, although it is important to weigh the pros and cons before committing to the conversion.
For individuals expecting lower income in 2024, leveraging the 0% long-term capital gains tax bracket could be a valuable tax planning opportunity. This rate applies to taxable income of $47,025 or less for single filers and $94,050 or less for married couples filing jointly. The wide span of the 0% bracket opens up possibilities for individuals, including those with six-figure earnings, to benefit from tax savings. By strategically selling and repurchasing assets, individuals can reset the asset’s purchase price, or basis, and potentially save on future capital gains. However, it is crucial to conduct thorough projections of your 2024 taxable income before engaging in any gain harvesting activities. Additionally, consider the long-term plans for the asset, as this strategy may not be suitable for assets intended for inheritance due to the stepped-up basis they receive upon passing.
When contemplating these tax planning strategies, timing plays a significant role in maximizing their benefits. Franco-Cicero recommends waiting until the end of the year approaches to make decisions, as this will provide a clearer picture of your projected income for 2024. By carefully assessing your financial circumstances and consulting with financial advisors, you can make informed decisions regarding Roth IRA conversions, capital gains harvesting, and other tax planning opportunities. It is essential to consider not only the immediate tax implications but also the long-term advantages and implications of each strategy.
While job layoffs and periods of unemployment can be financially challenging, they can also present unique opportunities for tax planning and savings. By staying informed about tax laws, consulting with financial professionals, and making strategic decisions based on your individual circumstances, you can navigate these challenging times with a focus on long-term financial stability and growth. Remember that tax planning is a continual process, and it is essential to adapt your strategies as your financial situation evolves.