Taxpayers with an Abnormally Low-Income Year
Having an abnormally low taxable income for the year can actually give rise to some interesting tax planning strategies, including taking or increasing IRA distributions, deferring deductions, doing Roth IRA conversions, taking advantage of the zero capital gains tax rate, and capitalizing rather than expensing business purchases.
Becoming unemployed, wages lower because of being ill or had an accident and not working as much, having a substantial NOL carryover and other reasons may create an unusually low-income year. If a preparer is aware of this before the year ends there are some strategies that the taxpayer can use to take advantage of the situation.
Defer Deductions
If itemizing deductions, the client could defer year-end deductible payments until after the first of the year and preserve the deductions for the next year. Such payments might include house of worship contributions to satisfy a tithing commitment, year-end charitable giving, tax payments (but not those incurring late payment penalties), estimated state income tax payments, medical expenses, etc.
Convert Traditional IRA Funds into a Roth IRA
To the extent of the negative taxable income or even just the lower tax rates, a client could consider converting some or all of their traditional IRA into a Roth IRA. The lower income provides an opportunity to convert to a Roth IRA at a lower tax amount.
Zero Capital Gains Rate
There is a zero long-term capital gains rate for those taxpayers whose regular tax brackets are 15% or less. This may allow appreciated securities owned for more than a year to be sold and pay no or very little tax on the gain.
Business Expenses
The tax code has some very liberal provisions that allow a business to currently expense, rather than capitalize and slowly depreciate, the purchase cost of certain property. In a low-income year it may be appropriate to capitalize rather than expense these current year purchases and preserve the depreciation deduction for higher income years. This is especially true where there is a negative taxable income in the current year.
CAUTION: If the client has obtained medical insurance through a government marketplace, employing any of the strategies mentioned could impact the amount of the allowable premium tax credit.