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Your Year-End Financial “To Do” List

Your Year-End Financial “To Do” List

November 08, 2021
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From the hope that came with reopening to the disappointment of another COVID-19 resurgence, 2021 is panning out to be another roller-coaster year. With the fourth quarter upon us, one routine remains consistent: it’s time to start organizing your finances for the new year.

If you feel like you’ve read an article like this on our site before, you’re not experiencing déjà vu. At least once a year--and sometimes twice--we post these kinds of checklist articles to get you thinking about important decisions you may need to make about your financial plan. While you can certainly do most of them anytime, there are certain actions that may offer better tax and other benefits if you do them at the year-end. Here are ten of them. 

1. Boost your retirement contributions

Are you maximizing contributions to your workplace plan? If not, now’s the time to think about increasing your contribution to take full advantage of any employer match benefit. For 2021, the maximum employee deferral for 401(k), 403(b), and 457 accounts is $19,500, and individuals ages 50 and older can defer an additional catch-up of $6,500. For SIMPLE IRAs, the deferral remains $13,500 and the catch-up is $3,000. (Note: Some of these limits are rising in 2022.)

Maxing out your contributions to a traditional IRA is another option. The SECURE Act repealed the maximum age for contributions, so individuals ages 70 and a half and older who earned income in 2021 can contribute to a traditional IRA. Modified adjusted gross income (MAGI) limits for contributions to traditional and Roth IRAs increased in 2021, so be sure to review MAGI eligibility thresholds. The maximum contribution amount to a traditional or Roth IRA remains $6,000 with a $1,000 catch-up for clients ages 50 and older.

2. Use FSA dollars and make HSA contributions

Note that in 2020, the IRS relaxed certain use-or-lose restrictions for Flexible Spending Accounts (FSAs) that remain in effect this year. Employers can extend the grace period for unused FSAs up to 12 months in 2021. In addition, if you have a dependent care FSA, you can save as much as $10,500 in 2021.

If you have a high deductible health plan (HDHP), now is a good time to explore maximizing your Health Savings Account (HSA) contributions. In 2021, the maximum contribution for an individual HSA is $3,600, and the maximum for a family HDHP is $7,200. If you’re age 50 or older you can contribute an additional $1,000.

3. Manage your marginal and capital gains tax matters

 If you’re on the threshold of a tax bracket, you may be able to put yourself in the lower one by deferring some income to 2022. Here are a few thresholds to keep in mind: 

  • 37 percent marginal tax rate: Taxable incomes exceeding $523,600 (individual), $628,300 married filing jointly), $523,600 (head of household), and $314,150 (married filing separately)
  • 20 percent capital gains tax rate: Taxable incomes exceeding $445,851 (individual), $501,601 (married filing jointly), $473,751 (head of household), and $250,801 (married filing separately)
  • 8 percent surtax on investment income: The lesser of net investment income or the excess of MAGI greater than $200,000 (individual), $250,000 (married filing jointly), $200,000 (head of household), and $125,000 (married filing separately)
  • 9 percent additional Medicare tax: W-2 earnings and self-employment income above the same MAGI thresholds as the investment income surtax (For clients with W-2 earnings above the MAGI thresholds, total Medicare taxes will be 2.35 percent; for self-employed clients, total Medicare taxes will be 3.8 percent.)

4. Rebalance your portfolio

Restoring your mix of stocks and bonds to their target allocations can get your investment plan back on track and may reveal tax planning opportunities, such as harvesting losses to offset capital gains.

5. Make your charitable giving payoff

The CARES Act above-the-line deduction was extended to 2021, meaning you can deduct up to $300 per person ($600 if you file jointly) for cash charitable contributions. If you itemize, the deduction of up to 100 percent for all cash charitable contributions is available in 2021. (Please note: This deduction doesn’t apply to cash contributions made to donor-advised funds or private, nonoperating foundations).

Qualified charitable distribution (QCD) rules haven’t changed, so if you’re older than 70 and a half, you can make a QCD of up to $100,000 directly to a charity; if you’re married and filing jointly, you may exclude up to $100,000 donated from each of your and your spouse’s IRA.

6. Form a plan for stock options

If you hold stock options, it’s a good idea to develop a strategy for managing your current and future income. As part of this, be sure to have your tax advisor prepare an alternative minimum tax (ATM) projection. Keep in mind, ATM exemption limits increased in 2021 to $73,600 for single tax filers and $114,600 for married joint filers. If you’re thinking about exercising incentive stock options, you may want to wait until January 2022 if, depending on your ATM projections, there’s any tax benefit to waiting.

7. Prepare for estimated taxes and RMDs

Under the SECURE Act, if you reached age 70 and a half after January 1, 2020, you can wait until you turn 72 to start taking RMDs. RMDs are required in 2021.

If you took coronavirus-related distributions (CRDs) from your retirement plan, you may want to review the repayment option you chose in 2020. Remember, the choice not to repay all of a CRD in 2020 is irrevocable.

8. Adjust withholding taxes if necessary

If you think you may be subject to an estimated tax penalty, consider asking your employers (via Form W4) to adjust your withholding to cover shortfalls. The IRS tax withholding calculator can help you with your estimates.

9. Start planning for Medicare enrollment

If you’re turning 65 next year and are no longer eligible to be covered by your (or your spouse’s) employer healthcare plan, you must sign up for Medicare within the seven-month window that starts three months before you turn 65 and ends three months after the month you turn 65 to avoid late-enrollment penalties. If you’re currently on Medicare, you can change from one Medicare Advantage plan to another or move from Medicare Advantage to Traditional Medicare during the winter enrollment period (January 1-March 31, 2022).

10. Assess your estate plans

Year-end is always a good time to review and update your estate plan to make sure it’s still in line with your goals and accounts for any change in circumstances. Depending on your net worth, establishing a defective grantor trust, spousal lifetime access trust, or irrevocable life insurance trust may be an effective strategy to reduce your estate tax exposure.

In addition, take the time to update your beneficiary designations and review trustee appointments, power of attorney provisions, and health care directives.

Seem overwhelming? Help is available

It’s not too early to get a jump on planning—and even though your situation is unique to you, this high-level checklist can be a great starting point. If some of this seems overwhelming, considering speaking to a financial advisor, CPA, attorney or other professionals can help ensure you’re prepared for the coming year.

 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

 

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Dan Flanagan is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or dflanagan@canbyfinancial.com

 

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