11 financial planning and tax-saving moves to make before year end
As we rapidly head into the last few weeks of 2021, now is the time to take care of any time-sensitive financial planning moves and get prepared for 2022. You may be able to reduce your tax bill, too, with some of these action steps.
1. Maximize your retirement savings
You have until December 31 to make any last-minute contributions up to your limit up to $19,500. If you are 50 or older, you can also make an additional catch-up contribution of $6,500. Contributions to tax-deferred retirement accounts such as a 401k reduce your taxable income and provide tax-deferred growth. If you participate in a 401k, be sure to contribute at least enough to get the employer match if not your full amount. [Note: If you have an IRA, you have until April 15, 2022 to make your contribution up to $6,000 plus another $1,000 if you are 50 or older]
2. Contribute to your health savings account
This powerhouse “retirement” asset with its triple tax benefit* (tax-deductible contributions, tax-free growth and tax-free distributions for qualified expenses) should not be overlooked. If you have a high deductible health insurance plan that allows for an HSA contribution, be sure to take advantage of the full contribution limit before December 31. You can contribute $3,600 per individual ($1,000 extra if you’re 55+) or $7,200 for the family. If you have to choose between this contribution and a retirement account (from #1), do this contribution first. You’ll be thankful later for the tax benefits.
*states may tax contributions and capital gains.
3. Plan your charitable giving
Give to a favorite charity for tax savings
Like other aspects of your finances, charitable giving can be part of a broader financial plan. One way to maximize the tax benefits is to concentrate your giving into a high-tax year. Giving a large amount one year and not the next could maximize your itemized deductions in that year. Giving appreciated assets like shares of a mutual fund with a low-cost basis is a tax-efficient way to give. If you are age 70 ½ or older, you might also consider donating up to $100,000 directly to a charity from your IRA, using a qualified charitable distribution (QCD). You can use this toward your required minimum distribution and not have to report the amount as income.
Contribute to a donor-advised fund
If you decide to accelerate your charitable giving, opening or using an established donor-advised fund is an effective strategy. With a donor-advised fund, you can make a large contribution that can be paid out later over time to charities. If you donate securities, you will get an income tax deduction based upon the market value of the donated securities.
4. Gift assets to your loved ones
This year you can give up to $15,000 per recipient in federal tax-free gifts without having to file a gift tax return with the IRS. If you’re married, you can double this to $30,000 to an individual. The number of recipients is unlimited. If you have kids getting ready for or graduating from college, it may be a good time to pass assets onto them.
5. Revisit your investments and emergency reserve
Do you have enough liquidity right now if you’re faced with an emergency? If you are working, a rule of thumb is to have 3 to 6 months of basic spending set aside as a cash reserve. If you’re retired, consider setting aside one to two years of planned spending in a cash reserve so that you won’t have to sell securities at an inopportune time. If you’ve been invested in equities over the past few years, your portfolio may be off kilter, no longer matching your ideal balance of fixed income and equities. Now is a good time to take some risk off the table (before a major market correction) and rebalance back to your target investment mix.
6. Check your credit
You may not give much thought to your credit score if it has always been good. Since you’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies, it is a healthy financial habit to check your report. Better to catch errors early before they burgeon into a problem. Plus, a strong credit score can help if you decide you want start a business or buy a vacation home down the line. If it all looks good – congratulations! You can bask in the security of knowing you have strong credit. Order your copy from annualcreditreport.com or call 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth to verify your identity.
7. Review or establish an estate plan
Check all of your primary and contingent beneficiary designations on IRAs, insurance policies, employer retirement plans, investment accounts and bank accounts. Scan your will to make sure it reflects your current wishes and the current law. Make sure you have funded your living trust and titled any new assets accordingly. Establish or review Powers of Attorney for Health Care and Legal/Financial matters to confirm the people named are still appropriate and that the powers of attorney are compliant with HIPAA. If you have a teenager who is now 18, make sure you have set up power of attorneys and other legal paperwork so you can still access their finances, health, or education information.
8. Review your 2021 savings and create a plan for 2022
Are you saving enough to “make work optional” when you’re ready? Trying to live well now and in the future? Take a look at the total amount you saved in 2021. Did you save in the range you expected? While people often get caught up in managing what they spend, you really want to focus on what you save. Set a clear savings target for 2022 and make that happen. From there, spend how you wish. Balancing enjoying life today and saving for tomorrow is a challenge, especially at during your midlife years when you are at peak busyness. When you know how much you need to save to get the outcome you want, you can feel better about the choices you make during the year.
9. Put together a personal net worth statement
A good tool to use for monitoring your financial status is a personal net worth statement. This snapshot can help bring to life what you own and what you owe. If a majority of your wealth is tied up in your business, in a single company, or in one asset, then you may want to decide what changes, if any, you can make to reduce your risk. Also, it may be time to re-evaluate your insurance coverage if your net worth has increased.
10. Revisit your company’s retirement plan
This one is for business owners. While you have until your tax filing deadlines to make contributions to your retirement plans, it is a good time to review whether growth or other changes at your company mean that a plan review is in order to ensure you have the right plan in place for your situation. If you have not revisited your 401k since you launched it, you may be surprised at the improvements you can make to your offering for both you and your employees.
11. Time your expenses
Another one for business owners. As with every year, think about the timing of receipts and expenses in light of anticipated 2022 cash flows and tax rates. There may be expenses it would make sense to pay in 2021 to reduce income. While tax policy changes for 2022 remain uncertain, the IRS has announced significant increases in income levels within brackets and other inflation adjustments, possibly reducing your 2022 tax liability.