Tax and Financial Planning Ideas for a Lower Income Year

You started a business, were unemployed for part of 2011 or recently retired, chances are your income is lower than what you've earned in the past.  For those of you who's income drop in 2011 for whatever reason, there may be some good news when you file your 2011 tax return in 2012.  There are a number of tax benefits and credits that one may qualify for in a year that your income is lower.  One example is the Retirement Savings Contribution Credit.  Someone married filing a joint return can earn income as high as $56,500 and still qualify for this credit if you fund an IRA or other retirement account.  This credit applies to Roth IRAs as well.   In a year that your income is a lot lower it may make sense to fund a Roth IRA instead of a Traditional IRA. The nontaxable income in retirement provided by a Roth IRA may outweigh the benefit of a current tax deduction, especially if your current marginal tax rate is low and you expect to be taxed at a higher rate in retirement.

When your income drops you'll also want to review all the itemized deductions that are subject to percent of income limits such as medical, job hunting, employee business and investment expenses.  In the past your income may have been too high to take advantage of these deductions but in a lean year you may be able to itemize these types of deductions.

Many tax benefits are phased-out or not available for higher income taxpayers.  In a year that one's income is lower there can be tax deductions and credits that you may have not qualified for in the past that you can take advantage of now.  Funding retirement accounts (if eligible) can still make sense in lean years because there can be tax and financial advantages to continuing these contributions.  If you have college age children apply for financial aid by completing a FAFSA application early in the New Year.  Financial aid eligibility may also be a silver lining for a lower income year.

 Best wishes to you in the New Year.  As always if you have any questions or comments regarding this information please don't hesitate to comment or contact me.  Thanks for your time.

Andrew Jordan, CPA, MSF
248-514-6213

The information provided is not intended as a substitute for legal or other professional services. Legal or other expert assistance should be sought before making any decision that may affect your situation.