In a time where the labor market is strong, some individuals may find themselves facing increased competition in their job search. Despite this challenge, experts suggest that prolonged unemployment and reduced income for the year 2024 could actually provide opportunities for effective tax planning. Certified financial planner Jaime Quinones from Stockade Wealth Management in Marlboro, New Jersey, highlights that one potential advantage of a job layoff is the temporary decrease in the federal income tax bracket, which could pave the way for future tax savings.
While experiencing three to four months without a regular income could lead to a significant drop in your 2024 tax bracket, any subsequent increase in income from a new job could mitigate some of these potential savings. If you anticipate a decrease in income for the year 2024, there are various tax planning strategies that you can explore with the guidance of experts.
One appealing strategy to consider in a lower-income year is Roth individual retirement account (IRA) conversions. This involves transferring pretax or nondeductible IRA funds into a Roth IRA. Although this conversion incurs regular income taxes on the converted balance, the lower tax bracket may result in a reduced tax liability. According to CFP Catalina Franco-Cicero, a wealth advisor with Tobias Financial Advisors in Plantation, Florida, converting funds to a Roth IRA provides a valuable opportunity for tax-free growth and future tax-free distributions. It is important to note that you do not need to make an immediate decision regarding this strategy; instead, you can wait until the end of the year to evaluate your projected income for 2024.
For individuals with low enough income, leveraging the 0% long-term capital gains tax bracket for 2024 can be an advantageous tax planning move. Single filers with taxable income of $47,025 or less and married couples filing jointly with $94,050 or less may qualify for this bracket. This wide-reaching bracket offers the opportunity to reset an asset’s purchase price, or “basis,” by selling and immediately repurchasing the asset. By resetting the basis, you can potentially save on future capital gains taxes. It is essential to conduct projections of your 2024 taxable income before engaging in any gains harvesting. Additionally, consider your long-term plans for the asset, as this strategy may not be suitable for assets intended for heirs, who will automatically receive a stepped-up basis upon your passing.
In times of unemployment and reduced income, proactive tax planning can help individuals navigate financial challenges and capitalize on potential tax savings opportunities. By working with financial advisors and exploring strategies such as Roth IRA conversions and leveraging the 0% long-term capital gains tax bracket, individuals can make informed decisions to optimize their tax situation for the year 2024 and beyond. Remember that tax planning is a personalized process, and seeking professional guidance can ensure that you make the most of the available tax-saving opportunities.
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