Most of the tax planning we do with clients revolves around trying to reduce taxable income and minimize the taxes being paid in a given year. However, there are some life events that might lead to you having a (comparatively) low income year – maybe one spouse has decided to take a break from the workforce to care for children, or you started a business, or you’re retiring.

The goal of tax planning is to minimize the taxes you pay over the course of your lifetime, and these lower income years provide an opportunity to take advantage of lower tax rates that you don’t want to give up. Here are 5 ways you can take advantage of being in a lower tax bracket.

1. Roth IRA or 401(k) Contributions

If you expect to be in a higher tax bracket when you withdraw money from your retirement accounts than you are today, then contributing to a Roth account is the way to go. These are after tax contributions, but the contributions and earnings come out tax free after age 59 1/2.

2. Exercise Stock Options

If you’ve been holding stock options – especially non-qualified stock options where you pay taxes on the difference between the stock price and the strike price when you exercise – a low income year is a great time to consider exercising your options. 

3. Capital Gain Harvesting

If you hold investments in a brokerage account, you should consider realizing some of the gains in the account by selling and then repurchasing your investments. If you file a joint tax return and your taxable income is under $89,250 (for 2023), you pay 0% taxes on capital gains. Even if your income is higher, you may still be able to take advantage of lower rates as opposed to selling investments in a higher income year.

4. Roth Conversions

If you have savings in a traditional IRA – maybe you’ve rolled over a balance from a previous employer’s 401(k) – you can convert this money to a Roth IRA at any time. You’ll pay tax on the money when you convert it, which makes this a great strategy for a lower income year.

5. Delay Business Expenses

If you’re a business owner and you have certain expenses that are flexible – think purchasing new equipment or timing of advertising campaigns – consider pushing those expenses into a higher income year. The higher the income tax bracket that you’re in, the more the deduction is worth.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.