End of Year Financial Checklist!

Seriously? It’s almost Christmas again? Yikes! Before you go and “break the bank” this season, let’s review a few things you can do before year-end to protect both your financial present and future.

1.) Maximize Your 401(K) Contributions!

This strategy is among the top priorities in almost every financial plan. The maximum for 2021 is $19,500 or $26,000 if you are over 50. Check with your 401(k) service provider to see that you are on track to maximize your contributions by year-end.

2.) Prepare for Tax Impact

For those of you who do not like 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. And, it 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, I suggest using the IRS Withholding Calculator to give you an idea of whether you are likely to owe more or be entitled to a refund. I have personally found this tool to be very accurate. All you need when doing this, is a copy of your most recent paycheck stub. This is a great tool, in fact, I suggest that you use it at the beginning and middle of every year.

3.) Do NOT Forget to 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 types of accounts have never been taxed, and the IRS needs to start collecting. The amount you have to take is based on a specific formula related to your life expectancy. It is called a Required Minimum Distribution, or “RMD.” Emphasis on the word “required.” You can always take more, but you have to at least take the minimum. In order to prevent you from leaving all the money in the account indefinitely (thereby transferring large amounts of compound growth to your heirs) they apply a 50% penalty if you forget to take it! 50%!! For this reason, they allow you a little extra time your first year, giving you until April 1st of the following year to take your distribution. However, waiting until April is usually inadvisable as it means you have to take two RMDs in a single year. There are times it does make sense to wait, but that is fairly unusual. So, if you have a Traditional IRA, SEP IRA or a 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-in with your plan sponsor or CPA for more details in this regard.

4.) Review Your Medicare Elections

Whether you have Traditional Medicare with Supplemental Insurance or a Medicare Advantage policy, review your plan to make sure that it provides a benefit most suited to your specific needs. Companies make changes to their policies, and sometimes discontinue plans, so it is important to review your benefits each year and not assume that you have the same exact coverage as the year prior. Don’t neglect the prescription drug coverage either. Your prescriptions may have changed throughout the year which could make another plan more cost-effective. The Annual Open Enrollment begins October 15th and goes until December 7th. The changes you make will take effect the 1st day of the new year.

5.) Spend Down Your Flexible Spending Accounts

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

6.) Make Your Donations!

To deduct your charitable donations in any given year, they have to be made by December 31st. 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 $24,800 (married filing jointly) or $12,400 (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 2021 annual gifting limit is $15,000 per taxpayer which means if you are a couple, you can gift $30,000. 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 as a way to transfer wealth to others during life to reduce estate tax upon death and not have to do the paperwork during life. Although, at present, your estate would have to exceed $11,700,000 for a single person and $23,400,000 for a couple for estate tax to be applied. In any case…the gift needs to be made before year end. Please note that there are a number of changes being proposed in the American Families Plan which may affect these numbers before year end. We will not know until the law is passed.

8.) Harvest Investment Losses

This is likely not the year for losses, at least not for most of you and certainly not for our clients. That being said, every year you should look across your investment lineup in accounts where you may realize capital gains to see if you happen to have any investments with losses. These accounts include, trust accounts, individual brokerage accounts, joint tenant and community property accounts. To be clear, 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 that you may have incurred throughout the year and can produce an additional $3,000 tax deduction. You have all heard that you should never sell low, which is true, particularly if you sell low and leave that money uninvested and in cash. But, if you sell low and simultaneously buy low, you don’t do any investment damage. The thing to know here however, is that 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. But 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 happen to be in a year where you won’t owe much in tax, 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 that you have to include any amounts converted as ordinary income. Any Roth conversions that you intend to do for the year must be completed by December 31st. Again, 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 off with exercise and a healthy breakfast; it leads to other good decisions throughout the day. Do the same for your finances. Understanding how much money is coming in and where it goes, is imperative in taking control of your financial situation. Which is precisely why having a budget is so important. (Please see my article on budgeting which includes a cash flow spreadsheet.)

NOTE: The Biden Administration has proposed the American Families Plan which, in addition to increased benefits to the American people, includes a number of significant changes to tax law. Please be aware that some of the facts above may be altered before the end of the year.

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