End-of-Year Financial Checklist

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It’s that time again, the end of the year is here. While you’re making your list and checking it twice, keep these financial tips in mind to take advantage of tax benefits, find cost-effective solutions, and begin the new year in control of your finances.

1. Maximize 401(K) Contributions

This strategy is among the top priorities in most financial plans. The maximum contribution for 2022 is $20,500 or $27,000 if you are over 50. Check with your 401(k) service provider to discuss whether you are on track to maximize your contributions by the end of the year.

2. Prepare for Tax Impact

For those who dislike surprises, end-of-year tax planning is a must. Meeting with your CPA and having them run a preliminary projection can help prepare you for an unexpected tax burden. It also gives you time to take advantage of tax deductions, like charitable contributions, before it is too late.

If you don’t have a CPA but rather do your own taxes, we suggest using the IRS Withholding Calculator to determine whether you are likely to owe more or be entitled to a refund. All you need is a copy of your most recent paycheck stub. This is a helpful and generally accurate tool, and we suggest you use it at the beginning and middle of every year.

3. Take Your RMD

Starting when you turn 72, the IRS insists that you take a minimum amount from your IRAs and 401(k)s every year. This is because money in these accounts has never been taxed, and the IRS needs to start collecting. The amount you have to take is based on a specific formula relating to your life expectancy. It is called a Required Minimum Distribution, or “RMD.” You can take more than the required amount, but you must take at least the minimum.

To prevent you from leaving the money in the account indefinitely and transferring large amounts of compound growth to your heirs, a 50% penalty is applied if you do not withdraw the minimum. For this reason, the IRS allows a little extra time in your first year, giving you until April 1st of the following year to take your distribution. However, waiting until April is generally inadvisable as it means you have to take two RMDs in a single year. So, if you have a Traditional IRA, SEP IRA, or SIMPLE IRA, be sure to take your RMD. You may also have to take an RMD from your 401(k); but those rules are too extensive to list here. Check with your plan sponsor or CPA for more details in this regard.

4. Review Medicare Elections

Whether you have Traditional Medicare with Supplemental Insurance or a Medicare Advantage policy, review your plan to ensure it provides benefits suited to your specific needs. Companies regularly make changes to their policies, and sometimes discontinue plans, so it is important to review your benefits each year. The Annual Open Enrollment begins October 15 and goes until December 7. Any changes you make will take effect on the first day of the new year.

5. Spend Down Flexible Spending Accounts

Don’t forget to have your teeth cleaned, eyes checked, and prescriptions refilled before year end. You want to use all of the money in your Flexible Spending Account (FSA) since it is a “use-it-or-lose-it” account. If you have the opportunity to make a change, consider using a Health Savings Account (HSA) instead. Unlike FSAs, unused balances in HSAs roll over from year-to-year.

6. Make Donations

To deduct your charitable donations in any given year, they have to be made by December 31. But, in order to get the tax benefit from a donation, you have to “itemize” your deductions. Note, you should only itemize if all of your deductions together equate to more than the standard deduction of $25,900 (married filing jointly) or $12,950 (single). Don’t let that stop you from making philanthropic donations, though. Just know that, unlike previous years, it may not help your taxes.

7. Consider Gifting Opportunities

The 2022 annual gifting limit is $16,000 per taxpayer. This means that if you are a couple, you can gift $32,000. This is the amount that you can gift to as many individuals as you would like without having to complete a gift tax return. Just to be clear, it isn’t that anyone would have to pay tax if it exceeds these amounts, but rather you just have to fill out paperwork so that it will be calculated at your death in your estate tax calculation.

This strategy of gifting no more than the annual gifting limit has typically been used to transfer wealth to others during life to reduce estate tax upon death. However, your estate would have to exceed $12,060,000 for a single person, or $24,120,000 for a couple, for the estate tax to be applied. In any case, the gift needs to be made before the end of the year. Please note that several changes are being proposed in the American Families Plan, which may affect these numbers before the year ends. We will not know until the law is passed.

8. Harvest Investment Losses

This is likely not the year for losses. That being said, you should always look across your investment lineup in accounts where you may realize capital gains to see if you have any investments with losses. These accounts include trust accounts, individual brokerage accounts, and joint tenant and community property accounts. This strategy does not apply to IRAs or 401(k)s. If you sell these investments, you capture losses for tax purposes. These losses offset an investment gain you may have incurred throughout the year and can produce an additional $3,000 tax deduction.

It is generally wise not to sell low, particularly if you sell low and leave that money uninvested and in cash. But if you sell low and simultaneously buy low, there is no investment damage. In order for this strategy to be honored by the IRS, you can’t re-invest in the same investment or even something substantially similar for 30 days. However, you can invest in something altogether different. Consult your investment professional and CPA regarding this strategy.

For a complete list of tax deductions, visit the IRS website.

9. Do Roth Conversions

If you do not owe much in taxes this year, consider converting some or all of your IRAs to a Roth IRA. Once you have converted to a Roth, all of those future earnings will be tax-free. You can convert a small amount or a large amount, just be prepared to include any amounts converted as ordinary income. Any Roth conversions that you intend to do for the year must be completed by December 31. Speak with your CPA and investment professional to see if this strategy is appropriate for you.

10. Prepare Next Year’s Budget

Starting a new year in control of your finances is like starting the morning with exercise and a healthy breakfast—it leads to other good decisions and increases your general health. Understanding your money flow and having a budget are imperative in taking control of your financial situation. Take care of your finances and prepare for the future by intentionally planning for the end of the year. Please see our article on budgeting, which includes a cash flow spreadsheet, for more information.

Authored by Michael J. Ryan, CFP® & Michael D. Manjarrez, CFP®

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