Income in 2024 Lower Than Usual? Consider These Year-End Tax Moves

Turn a Low-Income Year into a Financial Advantage with These Smart Tax Strategies

Photo by Dmytro Hai

The economy has been tough on a lot of people this year. With layoffs, disappearing middle-management roles, and disruptions in industries like tech, many white-collar workers find themselves earning less than they have in years past. You may have spent part of the year without a job, taken a role that pays less than your previous one, or pieced together freelance and consulting gigs to make ends meet.

While these challenges are real, a lower income year can also create unique tax-saving opportunities. These aren’t moves everyone should make, but they’re worth discussing with a financial planner or tax preparer to see if they’re right for you. Here are three key strategies to consider:

1. Make Roth IRA Contributions

A Roth IRA is one of the most tax-advantaged retirement accounts available. The catch? There are income limits that prevent high earners from contributing directly. If your income has been above these limits in the past, but this year it’s lower, you might now be eligible to contribute.

In 2024, you can contribute at least some money to a Roth IRA if you or your spouse earned income and your Modified Adjusted Gross Income (MAGI) was below:

• $161,000 (single filers)

• $240,000 (joint filers)

The maximum contribution is $7,000, or $8,000 if you’re 50 or older. And you have until April 15, 2025, to make your 2024 contribution.

Why this matters: Contributions to a Roth IRA grow tax-free, and withdrawals in retirement are also tax-free, provided you meet certain conditions. If you’ve been priced out of contributing in past years due to income limits, this is your chance to take advantage of a low-income year and lock in this long-term benefit.

2. Consider a Roth Conversion

If you have money in a traditional IRA, a lower-income year could be a great time to convert some of that money into a Roth IRA. Here’s how it works:

• You move funds from a traditional IRA to a Roth IRA.

• The IRS considers the money converted to be ordinary, taxable income in the year the conversion occurred. 

Why consider this? Normally, the additional income from a conversion could push you into an uncomfortably high tax bracket. But if your income is unusually low, that conversion may come at a much lower tax cost—or possibly no tax cost at all, depending on your total income and deductions.

Example:
Let’s say you have $50,000 in a traditional IRA that you’ve accumulated over time through pre-tax contributions. If you convert $10,000 of it to a Roth IRA this year, that $10,000 will be added to your taxable income for 2024. But if your total income is already in a lower tax bracket than in previous years, the extra tax burden will be minimal. From then on, the money in the Roth IRA will grow tax-free, and qualified withdrawals in retirement won’t be taxed at all.

It’s important to note that if your traditional IRA includes contributions that weren’t tax-deductible, the tax impact of a conversion becomes more complex. That’s why consulting a professional is so important.

3. Engage in Tax-Gain Harvesting

If your taxable income is low enough, you may qualify for the 0% long-term capital gains tax rate. This applies in 2024 if your taxable income is below:

• $47,025 for single filers

• $94,050 for joint filers

This creates an opportunity for tax-gain harvesting, which involves selling investments with long-term capital gains to take advantage of the 0% tax rate.

Example:
Suppose you bought shares of a mutual fund years ago for $5,000, and they’re now worth $10,000. If you sell those shares, you’ll "realize" $5,000 in long-term capital gains. Normally, you’d owe taxes on those gains. But if your income qualifies for the 0% capital gains rate this year, you’ll owe no tax on the sale.

You can even repurchase the same investment right after selling it, resetting your cost basis to $10,000. This means that when you sell the investment in the future, you’ll pay taxes only on gains above $10,000. If your income is higher in future years and your long-term capital gains rate rises, this move could save you significant taxes down the road.

Why this matters: Tax-gain harvesting allows you to lock in a tax-free step-up in basis, effectively reducing the taxable portion of your investments in the future. It’s a smart move for anyone planning to use these investments for major expenses like a home down payment or retirement.

Why Timing Matters

Each of these strategies relies on the unique tax benefits of a lower-income year:

• Roth IRA contributions are a rare chance to invest in a tax-free growth vehicle if your income has dipped below the eligibility limits.

• Roth conversions let you "lock in" lower tax rates now to avoid paying higher rates later.

• Tax-gain harvesting allows you to take advantage of the 0% long-term capital gains rate, saving you money in the future.

Final Thoughts

These opportunities can be powerful, but they’re not one-size-fits-all. Your financial situation is unique, and these strategies require careful planning to ensure they align with your long-term goals. Consulting with a financial planner or tax professional is the best way to make sure you’re making the right moves for your circumstances.

If your income is lower this year, these three strategies—Roth IRA contributions, Roth conversions, and tax-gain harvesting—can help you turn a tough situation into an opportunity for long-term financial benefit.