Tax Tips If You Have Low Income This YearSubmitted by AssetGrade, LLC. on December 7th, 2018
Submitted by Pat Cote on December 7, 2018
If you went back to school in 2018 or recently started a business and are incurring start-up losses, your income might be unusually low in 2018. If so, the tax strategies to address by December 31 are likely quite different than a typical income year: in particular, you should consider realizing unrealized capital gains or converting tax-deferred IRAs to Roth IRAs.
Both of these strategies aim to take advantage of the lower marginal income tax rates at lower incomes. For example, the following tax rates apply in 2018 if your taxable income is $77,400 if married filing jointly or $38,700 if single:
- 12% Federal income tax
- 0% Long-term capital gains tax
To realize unrealized capital gains, look through your holdings in your taxable brokerage account. Any holdings that have a lower cost basis than the current market value have unrealized capital gains. You can sell the holdings to lock in the gains now. The good news is that the wash sale rule, which applies to tax-loss harvesting, does not apply when you are locking in a taxable capital gain. The wash sale rule was set up by the IRS to prevent people from selling a holding to lock in a capital loss for tax purposes, then turning around and buying the same asset immediately afterward.
If you have pre-tax money put aside in a 401(k) at a former employer or in a traditional or rollover IRA, you can convert that money to a Roth IRA and create taxable income. If it is in an old 401(k), start the process soon, because you will have to roll over your 401(k) to a rollover IRA, and then do the Roth conversion. Also, you do not have to convert the entire amount, you can pick the exact amount to convert to help you take advantage of your unusually low income tax rate in 2018.
For both of these techniques, your best bet is to work with a CPA to make sure you are doing them correctly to optimize your taxes.