Five items for your year-end financial checklist
Updated: Mar 22, 2022
At this time of year when families are busy checking off their holiday lists, there are also a few items that should be on your year-end financial checklist as well. This year has some especially advantageous strategies that you may not be able to take advantage of after 2021 comes to a close.
Here is a list of five financial planning items to consider:
1. Have you harvested losses in your non-retirement investment accounts?
You can take losses on your tax return up to $3,000 and carry forward unused losses.
This year you can also take advantage of special treatment for disallowance of wash-sale rules for crypto currency. Normally shares sold at a loss cannot be bought back for a period of 30 days or they trigger a so called “wash-sale”. Currently this tax rule does not apply to owners of crypto tokens. However, the current proposed tax bill may be eliminating this starting in the new year so you should consider taking action now.
2. Are you currently using a “back door Roth” strategy?
Another part of the proposed tax legislation is an elimination of the “back door Roth” strategy. If you have been making annual contributions to an after-tax IRA or 401(k) you may need to take action before the end of the year. If not, these funds may not be eligible to be converted and will be trapped in that account.
3. Are you close to qualifying for one-time tax credits or stimulus payments?
In 2021 there are a host of enhanced tax benefits you may qualify for. Most notably are the series of one-time stimulus checks. If your income was too high based on your prior year’s tax filings you did not receive the benefit. However, you can still receive and claim these amounts if your income qualifies for 2021.
If you are close to qualifying, any steps you can take before year-end to reduce your income by taking extra deductions or deferring income may be beneficial. The stimulus payments are $1,400 per qualifying individual. So, a family of four who could structure their income to be eligible would receive an extra $5,600 payment at tax filing time.
Here are several ways you can consider reducing income:
Fund small business retirement accounts
Increase final 401(k) contributions
Harvest tax losses
Push income into next year to the extent possible
Unfortunately, by the end of the year your tax-planning options are more limited. Pro-active planning throughout the year is the best path to making sure you take advantage of all opportunities available to your family.
4. Have you funded education savings 529 plans to your desired amount?
If you are in a position where you may have excess cash balances that exceed your emergency fund, you may wish to consider making an extra “one-time” contribution to your kids or grandkids 529 plan.
Many states offer tax deductions for the contributions you make during the calendar year. An often-misunderstood rule in the state of Virginia allows you to take a $4,000 state tax deduction to each investment account you contribute to. If multiple parents use multiple accounts, you can easily get your annual deductible contributions to $16,000 or more for each child.
5. Get into the holiday spirit by making charitable donations?
Ordinarily you need to itemize your tax deductions to be able to take a deduction for charitable contributions. Tax law changes updated this for 2021 and now married couples are able to contribute and deduct up to $600 without having to itemize.
GuidePoint Financial Planning - Reston Financial Planning
Ryan Phillips, CFA, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.