As we near the home stretch of the holiday season, we hold many last-minute financial housekeeping meetings with clients. I am always impressed by their willingness to carve time out of their busy schedules. But I’m glad they do because most people expect quiet time over the holidays and need help deciding which financial moves to make before the end of the year.
We have a checklist to guide this process (which you are welcome to download), but we recommend pairing it with the contextual insight below. So, for those who either don’t have time to meet or have yet to find a holistic financial planner, perhaps the following tips will help you make smart money moves.
Financial Moves to Make Before the End of the Year
1. Make Strategic Charitable Donations and Gifts
Although many of us give away small amounts of money all year long, it is wiser to take a more holistic view of your giving because some donations and gifts are tax deductible. The tricky thing, of course, is that everyone’s situation is different, and the rules are constantly in flux, so if possible, it is best to consult a professional who can give you tailored advice. To provide you with an idea of what I mean, below is an opportunity I often share with clients:
Consider Making Qualified Charitable Distributions (QCDs) From Tax-Deferred Retirement Account(s) or Gifting Securities.
When the Tax Cuts and Jobs Act (TCJA) took effect in 2018, it resulted in a much higher standard deduction and reduced opportunities for itemized deductions. Since the main reason to itemize is to claim deductions in excess of the standard deduction (and further reduce your taxable income), the net effect of that change is that, for many people, itemizing no longer makes sense. Unfortunately, that also eliminates the tax benefit of giving to charity for these folks.
However, suppose you have a personal or inherited retirement savings account subject to the required minimum distribution (RMD). In that case, a Qualified Charitable Distribution (QCD) might be a compelling option.
The IRS treats distributions from tax-deferred retirement accounts as income, i.e., they are subject to income tax. However, if you plan to donate to charity, you can do so directly from that account. That means the funds go straight to the charity and do not count as income. In other words, you get the tax break, the charity receives the total amount, and you can still claim the standard deduction. Win, win!
Now, to clarify, this strategy works best for people who are subject to required minimum distributions (RMDs), AND plan to take the standard deduction (vs. itemizing), AND wish to give to charity.
If you fall outside of this camp, there is another option.
If you possess appreciated securities (typically stocks) that you have held for over a year, you can gift them to charity and take a deduction at the full market value in most cases. That allows you to donate, take the deduction, and avoid the capital gains tax you would have paid if you simply sold that asset.
2. Wrap Up Required Minimum Distributions (RMDs) From Retirement Accounts
While we are on the subject, please take the required minimum distribution (RMD) from your tax-deferred retirement accounts. This point is critical, yet young people (with inherited retirement accounts) often need a reminder.
Required minimum distributions apply to IRAs for people over 70½ years old, or 72 if your 70th birthday was July 1, 2019, or later. But it also applies to inherited accounts, like IRAs or 401(k) retirement plans, regardless of the recipient’s age. These rules are nuanced and subject to change, so please confirm what applies to you.
Failure to take the required distribution from the aggregation of every account to which it applies results in an egregious 50% tax on the required amount. Also, as mentioned in tip one, you will be expected to pay income tax on the distribution, so plan accordingly.
3. Review Taxable Investment Accounts for Loss Harvesting Opportunities
Another intelligent financial move to make before the end of the year is to review your taxable investment accounts to see what you will owe in taxes (for any gains) and consider harvesting losses. You can then use those losses to offset any gains for the year, offset up to $3,000 in ordinary income, or carry them forward to offset future gains.
Please know this is not an opportunity to “game” the system. If you reinvest the funds into a “substantially identical security” within 30 days, the IRS will flag the transaction as a “wash sale,” negating any benefit.
In addition to offsetting capital gains, if you have suffered losses, this is also a good time to make changes to your portfolio. For example, I typically discourage clients from holding mutual funds in their taxable accounts for two reasons:
- First, the taxes on fund distributions can be costly over the long run.
- Second, the trading behaviors inherent to mutual funds can inadvertently expose them to the detrimental effects of market timing strategies.
Therefore, if we take on a new client with a taxable portfolio full of mutual funds, we actively look for opportunities to sell them. If the funds are down from their original investment, we will take the loss and reallocate the money into ETFs or index funds, likely reducing their tax bill for years to come.
4. Make Any Remaining Pre or After-Tax Contributions to Your HSA and Retirement Accounts
Technically, you can make 2022 contributions to your Individual Retirement Accounts (Roth and Traditional) and health savings accounts (HSAs) until April 15, 2023. However, since many people rely on payroll deductions into 401k’s for these contributions, check your pay stub to ensure you contribute as much as possible, as 401k contributions must occur by December 31st.
As a reminder, if you wish to max these accounts out, the contribution limits for 2022 are as follows:
- HSA (Health Savings Accounts)
$3,650 for individuals / $7,300 for families / +$1,000 for people 55 or older
- 401(k) Accounts
$20,500 for individuals / +$6,500 catch up for people aged 50 or older
- Traditional and Roth IRAs
$6,000 for individuals / +$1,000 catch up for people 50 or older
(although Roth contributions are subject to income limits)
- SIMPLE IRAs
$14,000 for individuals / +$3,000 catch up for people aged 50 or older
- SEP IRAs
$61,000 for individuals
You can contribute outside your payroll deduction to HSAs if you haven’t funded these accounts as much as you would like.
You might be surprised to see health savings accounts in this discussion. Since you contribute pre-tax money to an HSA and distributions are not taxed (as long as you use them for medical care), your HSA can function as a tax-free savings vehicle. In addition, most accounts even offer investment opportunities. So, maximize your contributions whenever possible and let the money grow.
5. Explore Other Strategies to Maintain a Lower Tax Bracket
Making strategic charitable donations and ensuring that you meet the required minimum distributions (RMDs) for your retirement accounts (as discussed in tips one and two) are the best ways to affect your tax bracket if all you have to work with are your personal finances.
However, if you are a small business owner or freelancer, talk to an accountant or tax advisor for additional ideas. For instance, there may be lawful yet beneficial revenue recognition strategies to employ as you get toward year-end.
6. Optimize Health Insurance Payouts
Take advantage of the cost-saving opportunities if you hit your health insurance plan’s individual or family deductible. For example, squeeze in any tests, exams, or procedures before December 31st to get the best payouts. On the flip side, if you have not reached your deductible, consider putting non-essential items off until 2023, so those costs can apply to next year’s deductible.
If you have a flexible spending account (FSA), don’t forget that the funds may expire at year’s end or shortly after (depending on your plan’s rules). If this is the case for you and you still have funds in this account, consider using them by purchasing medical supplies in bulk (like contact lenses, bandaids, etc.).
7. Consider the Impact of Familial Changes
As you think through financial moves to make before the end of the year, be sure to consider any changes in your family and how they will affect your personal finances.
For example, if you recently divorced, your taxes would be different. In addition to a potential change in your filing status, only one person can claim dependents. Many former spouses simply alternate years, but you must intentionally develop an understanding to avoid mishaps.
Money or assets received as an inheritance can also have an impact, depending on the source of the funds. For instance, distributions from an inherited annuity will increase your taxable income. If that will push you into a higher tax bracket, consider exploring strategies for managing that situation.
8. Review Your Financial Goals, Plans, and Progress
One final thing to do before the end of the year is to review your financial goals and plans in light of your progress and make any necessary adjustments. Here are a few specific items to explore
- Retirement Accounts
Given what has transpired over the last year, are you still on track to meet your retirement goals? If not, explore additional opportunities to save money.
- Emergency Funds
How much do you like to keep on hand for emergencies? Has that number changed, or did you deplete or grow those funds? If so, what do you need to do?
Do you still have the right mix of investment assets to suit your risk profile? It’s normal for things to shift over the year, so take this opportunity to reestablish balance.
- Anticipated Events or Milestones
Are you expecting a baby, sending a child to college, or doing anything else that will result in significant expenditures or financial change, like hitting a big birthday? If so, what do you need to do now to prepare?
- Sneaky Expenses
Have you picked up any unnecessary costs over the past year? For example, some people slowly rack up debt on credit cards or home equity lines of credit with high-interest rates or find that they are paying recurring fees for services they no longer use. Now is an excellent time to sleuth those things out and address them.
The Bottom Line
There are many options for optimizing your financial situation. However, when deciding which financial moves to make before the end of the year, it is best to do so with a team of financial professionals who can help explain what applies to you. Specifically, any tax-related planning must receive the final approval of your accountant or tax advisor under their authority from the Internal Revenue Service to administer tax advice. If we haven’t spoken already, please be sure to reach out, and don’t forget to download the checklist to complement the above information.
Then, relax and enjoy the holidays while spending some of your hard-earned money on something fun. After all, in the end, our goal is to empower you to set aside your worries and enjoy your life as we enter the new year.