Tax Strategies to Consider After a Prolonged Job

Tax Strategies to Consider After a Prolonged Job Layoff

In a recent CNBC article, our Wealth Advisor, Catalina Franco-Cicero, MS, CFP®, CTS™, was quoted on the topic of tax strategies during periods of unemployment. Despite a strong labor market, some job applicants face increased competition, leading to prolonged job searches. However, a period of lower income in 2024 could present valuable tax planning opportunities.

One potential benefit of a job layoff is a temporary drop in your federal income tax bracket, which can create opportunities for future tax savings. Even three to four months without regular income can significantly lower your tax bracket for 2024. While the income from a new job might offset some of the impact, the lower tax bracket period could be strategically beneficial.

Among the tax strategies to consider is a Roth individual retirement account (IRA) conversion. Catalina noted that converting pretax or nondeductible IRA funds to a Roth IRA can be particularly advantageous in a lower-income year. “It’s not a free lunch,” she said, “because you’ll still owe regular income taxes on the converted balance, but your bill could be lower in a smaller tax bracket.” Catalina emphasized that this can provide an excellent opportunity for tax-free growth and future tax-free distributions.

Another strategy involves leveraging the 0% capital gains bracket if your income is sufficiently low. For 2024, single filers with taxable income of $47,025 or less and married couples filing jointly with $94,050 or less could qualify for the 0% long-term capital gains rate. This bracket is quite wide, especially for married couples, allowing for potential six-figure earners to benefit. By resetting an asset’s purchase price or “basis” through selling and repurchasing, you can save on future capital gains. However, it’s crucial to run projections of your 2024 taxable income and consider the long-term plans for your assets before harvesting gains.

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