Financial tasks you should complete by the end of the year

Jeff Witz, CFP

What are some financial planning tasks I should focus on before year-end?

Near the end of each year, we like to provide a list of items everyone should review. The final months of the year are a good time to determine whether financial planning is on track. Do strategies need adjusting, or accounts require updating? The sooner these items are addressed, the better the position you likely will be in for 2022.

Is your emergency fund where it should be? If you tapped into your emergency fund for any reason this year, make sure the account is replenished. It is always a good idea to review your budget and see whether necessary spending has increased or decreased and then review your emergency fund level. The general rule of thumb for an emergency fund is to have 3 months of your necessary expenses saved in cash for a dual-income household or 6 months for a single-income household or if one individual earns significantly more and that income is relied upon to maintain your family’s standard of living.

Have you maxed out your retirement accounts or are they on track to max out by year’s end? 401(k) and 403(b) contributions must be made by December 31, 2021. The 2021 limit for employee contributions is $19,500. Individual retirement account (IRA) contributions can be made until the tax filing deadline in April 2022. The 2021 contribution limit for IRAs is $6000. If you are older than 50, catch-up contributions may be available.

Have you used all the money remaining in your dependent care or health care flexible spending accounts (FSAs)? Most FSAs are use-it-or-lose-it accounts, meaning money left over at the end of the year is forfeited back to the plan, not to you. Some employers do offer a grace period into next spring or a $500 carryover from one year to the next for health care FSAs, but most do not. Use this money so you are not leaving anything on the table.

Have you made contributions to your children’s 529 accounts? As the cost of college continues to rise, it is important to start saving as soon as possible. 529s offer excellent tax advantages if saving for college or other post–high school educational opportunities. Many states offer a state income tax deduction for contributing to a 529 account. Sometimes these tax savings can be substantial. Contributions must be made before December 31, 2021, to receive a 2021 tax deduction.

Have you designated all the gifts you planned to give this year? For 2021, the annual gift tax exclusion amount is $15,000 per individual or $30,000 for a married couple. This means you can give up to these amounts to an unlimited number of individuals without having to worry about gift taxes. Making gifts can be a great way to remove assets from an estate if future estate taxes are a concern. Gifts must be made before December 31, 2021.

Have you made your charitable donations for the year? Giving to charity can be a very powerful tax-savings tool. Check whether you have any appreciated investment assets you could donate instead of cash. Donating appreciated investments allows you to avoid paying capital gains taxes when you sell the investments, and you get to claim a deduction for the full value of the donated asset. The charity can then sell the investment and not have to pay capital gains taxes. However, be aware that with the increased standard deduction under current tax law, you may need to donate a substantial amount to see any tax benefit. Donations must be made by December 31, 2021, to count toward your 2021 taxes.

Have any of your investments lost money this year? If any investments in your taxable accounts are in the red, you could consider selling those investments to harvest the loss. Tax loss harvesting can be used to offset gains elsewhere or potentially lower your 2021 tax bill. If your captured losses exceed your realized gains, you will have a net capital loss. Up to $3000 ($1500 if you are married and file separately) of net capital losses can be deducted against ordinary income, including salary, self-employment income, and interest income. Any excess loss above these amounts can be carried forward to future years to cancel out gains or deduct against income. Sales to capture losses must occur before the end of the year to count toward 2021.

Do you need to update beneficiaries? If there has been a major change in your life, such as a marriage or divorce, the birth or adoption of a child, or a death in the family, you may need to update the beneficiaries on your retirement accounts and life insurance policies. You may also need to update your will and power of attorney documents. There is no deadline for these changes, but the sooner the better.

There are likely to be other items to check on, but this list should give you a good start on making sure you end the year on strong financial footing.

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The information contained in this report is for informational purposes only. Any calculations have been made using techniques we consider reliable but are not guaranteed. Please contact your tax advisor to review this information and to consult with them regarding any questions you may have with respect to this communication.