In the current labor market scenario, job seekers are facing increased competition which is leading to uncertainty in terms of job prospects. However, amidst this challenge, there are potential opportunities for tax planning that individuals can leverage. According to experts, prolonged unemployment or lower income for the year 2024 could actually provide a silver lining when it comes to tax planning strategies. Certified financial planner Jaime Quinones highlights the temporary benefit of potentially falling into a lower federal income tax bracket due to a job layoff. This situation can open doors to future tax savings for individuals.
Roth IRA Conversions for Tax-Free Growth
One key strategy that becomes more attractive during a lower-income year is Roth individual retirement account (IRA) conversions. These conversions involve transferring pretax or nondeductible IRA funds into a Roth IRA. While this move does incur regular income taxes on the converted balance, the advantage lies in the potential for lower tax bills in a smaller tax bracket. As noted by CFP Catalina Franco-Cicero, a wealth advisor, converting funds to a Roth IRA presents an opportunity for tax-free growth and future tax-free distributions. This strategy allows individuals to capitalize on potential tax benefits in the long run.
Another area of focus for tax planning in 2024 is leveraging the 0% long-term capital gains tax bracket. Individuals with taxable income of $47,025 or less for single filers and $94,050 or less for married couples filing jointly could qualify for this bracket. The wide range of the 0% bracket provides an opportunity for even six-figure earners, particularly in the case of married couples, to benefit from tax savings. By selling assets and immediately repurchasing them, individuals can reset the asset’s purchase price, also known as the basis. This reset allows for potential savings on future capital gains taxes. However, it is essential to run projections of your 2024 taxable income before executing this strategy and consider the long-term plans for the asset in question.
It is important to note that individuals do not have to make immediate decisions regarding these tax planning strategies. Waiting until the end of the year approaches provides a better understanding of projected income for 2024. This approach allows for a more accurate assessment of whether certain strategies, such as Roth IRA conversions or harvesting gains, align with your financial goals and tax planning needs. Additionally, considerations around assets that you plan to leave to heirs should factor into your decision-making process, as these assets may automatically receive a stepped-up basis upon passing.
Amidst the uncertainties of the job market and income fluctuations, strategic tax planning can offer individuals opportunities to optimize their financial situation. By considering the potential benefits of Roth IRA conversions, leveraging the 0% long-term capital gains tax bracket, and adopting a deliberate approach towards the end of the year, individuals can navigate the complexities of tax planning amidst job uncertainty effectively. It is essential to consult with financial advisors or tax experts to tailor these strategies to your specific circumstances and goals for 2024 and beyond.