Two Main Strategies for Low-Income Years

When you've had a financially difficult year, you have two main tax planning approaches:

• Take advantage of 0% capital gains rates by keeping other income low

• Bring more income into this year while you're in a lower tax bracket

Strategy 1: Take Advantage of 0% Capital Gains

The Special Deal on Capital Gains

If your overall income is low enough this year, you might pay 0% federal tax on long-term capital gains (investments held more than one year). That means no federal tax at all on the profits!

What This Means for You:

This might be the perfect time to sell stocks, mutual funds, or property you've owned for a long time. You'll get the profits without the usual tax hit.

Strategy 2: Bring Income Into This Low-Tax Year

Roth IRA Conversions

If you have money in a traditional IRA, consider converting some or all of it to a Roth IRA by December 31st. Here's why this makes sense in a bad year:

• The entire conversion counts as taxable income (unless you made non-deductible contributions)

• Since you're already in a low tax bracket, you'll pay less tax on the conversion

• Future withdrawals from the Roth will be tax-free

Using the Wash Sale Rules to Your Advantage

Normally, wash sale rules work against you by preventing you from claiming losses on stocks. But in a low-income year, you might actually want to trigger these rules to increase your income while you're in a lower tax bracket.

Here's how: If you recently sold stocks at a loss, you can buy them back within 30 days. This "washes out" the loss, increasing your taxable income for this year when your tax rate is lower.

Other Smart Moves for Tough Years

The Savers Credit

The federal Savers Credit is designed to help lower-income people save for retirement. If you have some cash available, contributing to a retirement plan could earn you this valuable credit on top of the regular tax benefits.

Unemployment Benefits Tax Planning

If you collected unemployment benefits this year, remember that they're subject to federal income tax. Have your taxes calculated early to avoid last-minute surprises when you file your return.

The Bottom Line

A tough financial year doesn't mean you should ignore tax planning. In fact, it can present unique opportunities to:

• Lock in gains without paying capital gains taxes

• Convert retirement accounts at lower tax rates

• Take advantage of credits designed for lower-income taxpayers

The key is recognizing that being in a lower tax bracket this year might actually be an advantage for certain tax moves.