2021 is almost in the books, as they say. The holidays are upon us, and we wish you tidings of comfort and joy. As the year winds toward the close, there are several year-end financial considerations that may be beneficial.
Adding to Tax-deferred accounts
Maximizing contributions to retirement plans, 401(k)s, IRAs, Roth IRAs, or HSAs provides important tax benefits that can help build wealth. Check to see if you will reach the maximum allowable employee salary deferrals by December 31st. If you are age 50 or older, you can make a catch-up contribution to your 401K or IRA.
If you have a health savings account (HSA), contributing the maximum allowable amount often makes sense. HSAs offer a trifecta of tax benefits. First, contributions are deductible, which helps reduce your taxable income. Secondly, earnings and appreciation of investments in an HSA are tax-free. Finally, withdrawals for qualified medical expenses are free of federal tax.
Charitable donations benefit the causes that matter to you and can also offer tax advantages. This provides opportunities for end of year financial planning.
Donating securities that have appreciated in value give you a double benefit: a tax deduction equal to the whole donation and avoiding tax on the security’s gains. You can do this on a large scale by contributing to a Donor Advised Fund. You receive a tax deduction for the full value of securities in the year you contribute them, yet you do not have to give it all out to charities in that year. You can use the donated securities for future year’s charitable giving while receiving the tax benefit up front.
Taxpayers age 70½ and older can make qualified charitable donations (QCD) from their IRAs. These distributions do not get counted as income on your tax return, yet they count toward your required minimum distribution. This effectively lowers your gross income, which can help lower your taxes along with gross-income-based surcharges such as the Medicare premium surcharge.
Capital gains and losses
Year-end is a good time to determine if there are any adjustments that should be made to your investments that would provide a tax benefit. Tax loss harvesting—selling positions in taxable accounts to realize tax losses. The loss is disallowed if you purchase the same security within 30 days of selling it, but if you replace it with a similar security, you can stay invested while still capturing the tax loss. Harvested losses can help to offset realized capital gains, which can help lower your tax bill.
Tax law changes still uncertain
In our last article, Changes on the Horizon for 2022, we outlined the proposed changes in the American Families Plan. These changes included higher tax rates, higher capital gain taxes, and a slew of income and estate tax changes. At the end of October, negotiations in the House of Representatives fell through and most of the proposed changes were scrapped.
The House passed an amended bill that is a $2 Billion social and climate spending package, which will be partially funded by taxes on the uber-wealthy (personal in the $10 million to $25 Million range) and corporations. The bill now heads to the Senate, where fifty votes are needed to pass. While we do not know how it will end up, it seems likely that we won’t see many personal income tax or estate tax changes in 2022.
Getting a jump on your 2022 planning
Don’t wait until year-end to do your financial planning. Rather, start planning for next year early. Are there any changes in your life situation, or any upcoming life changes? Your financial plan should account for these. And if it doesn’t, it’s time to update your financial plan. Similarly, consider these changes when reviewing your portfolio.
At Blankinship & Foster, we specialize in personal financial planning for retirees, physicians, and women in transition. We help you keep your financial plan in focus year-round.