Dec 9, 2014

Stewardship Strategies for a Year of Low Income; Savvy Financial choices to help you make the most of a slim year.

A while back my wife and I were home and had the kids in bed when all of a sudden the house went dark.  I peeked outside and the entire neighborhood was pitch black.  I took the opportunity to go outside and look at the stars.  It’s amazing how much you can see up there when the neighborhood isn’t lit up.  While I was standing in the lawn looking up the power came back on and the spectacular view faded away.  Had I stayed inside I would have missed a great view of the night sky with no ground light.  It’s not often I get that opportunity from my yard.

We see families who have special circumstances arise where they go for a year or more with very little income.  For some folks it’s a business that is struggling, for others it’s a chance to serve in long-term missions.  No matter the reason for a year with low income, these years can present an amazing opportunity to take advantage of financial planning strategies that aren’t available during a year of normal income. 
We work with wonderful couple who has decided to donate their time in Africa at a medical hospital.  They are excited to serve oversees and to use their talent to make a difference at a missions hospital.  The family plans to return to the states in a few years and will go back to making a physician’s salary for years to come. 
Here are a few ideas to make the most of a year of low income: 
Take Taxable Gains – If you’ve got appreciated assets that have pending capital gains, this is the perfect year to consider capturing gains.  The current tax rate for folks below the 25% tax bracket on capital gains is 0%.  That means that you may be able to sell assets with a gain and pay zero tax.  For example, if you bought a stock at $10 and it went up to $100 and you sold it, you would owe capital gains tax on $90 of gain.  If you sold this stock in a big tax year you could pay as much as 20% to the federal government and more to the state. By selling in this low tax year and staying in a low bracket, you may be able to avoid paying any tax on the sale of the security. 
Convert an IRA to a Roth IRA – In the past, while you were making more money, you deferred income to save taxes by contributing to your retirement accounts.  Now that you have a low income year it may be wise to pay the tax on that income.  A Roth Conversion allows you to move money from an IRA to a Roth IRA.  You are required to pay the tax on anything you convert, but if you deferred the tax in a year when your ordinary income tax rate was 35% and you convert to a Roth IRA in a low tax year, you could pay substantially less. Deductions could push your tax rate on the conversion below the 10% threshold.  The money you move to Roth IRAs grows tax free.  That means that the income from these accounts will give you income with no tax liability for the long term. 
Your tax return is a tricky thing.  There are a ton of moving parts.  Depending on the state that you file your tax return in, you could save even more.  It’s crucial that you engage your CPA and your financial planner to run the numbers.
For the missionary doctors in Africa that I mentioned we are converting $30,000 a year to their Roth IRAs and they’ll pay an extremely low rate.  After a few years serving abroad they’ll come back with their financial house in order.  For this family, the memories they are making serving in Africa at a missions hospital will impact their lives forever, and because of a bit of timely planning, the impact of their wise financial stewardship will pay dividends for years to come.
Whether you are taking a year to serve abroad, find yourself in between jobs, or your business is slow, don’t miss this chance to make your low income into an opportunity.
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