Use this year-end checklist to help navigate complex financial issues

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The end of the year is one of the most important times for investors because there are so many decisions to make that impact their overall financial planning.

This time around, the year’s end is marked with a lot of financial challenges, including inflation, market volatility, domestic political uncertainties and global geopolitical risks and issues. To help you navigate these complicated financial times, here’s a checklist to review and implement as applicable:

Shelter money from taxes

Max out your retirement plan contributions to your employer’s 401(k) plan by Dec. 31. Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed. And be sure to take advantage of any employer match.

More from Year-End Planning

Here’s a look at more coverage on what to do finance-wise as the end of the year approaches:

Workers who are younger than age 50 can contribute up to $20,500 to a 401(k) this year. If you’re at least age 50, you can add an extra $6,500 per year in “catch-up” contributions. Self-employed people also can contribute to a SEP-IRA, Simple or one-person 401(k).

Talk to your financial pro about also setting up an individual retirement account. And don’t forget that making deductible contributions to a registered non-profit is a great way to reduce your taxable income.

Review tax-loss harvesting

Speaking of taxes, what about those gains in your account that you’d like to realize, but prefer not to pay capital gains on? Do you also have investments in your brokerage account that are no longer serving you and trading in the red?

Tax-loss harvesting is a strategy used to sell selected investments in your portfolio at a loss in order to offset the negative tax impact from other investments sold at a profit. This can reduce taxes on the capital gains.

Speak with your financial advisor to request a 2022 gains/loss statement before year-end to review your options.

IRS raises income threshold and standard deduction for all tax brackets

Determine if the standard deduction is right for you…

It’s a smart move to get ahead for tax season. The standard deduction for married couples filing jointly for tax year 2022 is $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction is $12,950 for 2022, up $400, and for heads of households, the standard deduction is $19,400 for tax year 2022, up $600.

… or whether itemizing is better

According to the IRS, about 75% of taxpayers take the standard deduction but could be missing out on valuable tax deductions if they can itemize. Your tax advisor can help you determine which is better for you. 

If you do decide the itemize, you can supercharge the tax benefits by making early payments (before the end of the year) on at least one of several other deductions, including charitable donations, state income taxes, property taxes or a medical bill. Just be sure to talk with your tax advisor first if you’re subject to the alternative minimum tax.

Watch out for alternative minimum taxes

Accelerating tax deductions can cost you if you fall under the AMT rule or if you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class. It kicks in when income reaches a certain level, so it’s a good idea to check with your tax advisor for your status.

It’s more important than ever to stick to a budget and get your financial plan in order.

Winnie Sun

co-founder and managing director of Sun Group Wealth Partners

Note changes in tax breaks

Most of the big tax breaks enacted for 2021 have disappeared in 2022. So the child tax credit, child and dependent care credit, earned income credit and other popular tax breaks are different for the 2022 tax year.  Also know that the income tax brackets for 2022 are slightly wider than for 2021. The difference is due to inflation. 2023 tax brackets are moving even higher.

Give to save on taxes

For 2022, you can give up to $16,000 to each child, grandchild or any other person this year without having to file a gift tax return, pay gift tax or tap your exemption. The recipient isn’t taxed on the amount received, either.

You can also put that money into a 529 education savings plan account, tax-free, to a beneficiary of any age. Money invested in the 529 plan can be withdrawn tax-free if used for qualified higher education expenses.

Check IRA distributions

As it stands now, you must start taking required minimum distribution from 401(k) accounts, traditional IRAs and similar retirement savings accounts (other than Roth IRAs) in the year you turn 72. Failing to take out enough triggers IRS penalties.

Keep up on Social Security developments

This year, individuals are taxed 6.2% in Social Security taxes, up to $147,000 of earnings. The maximum amount of earnings subject to the Social Security tax will increase to $160,200 in 2023.

Due to inflation, Social Security checks will be 8.7% bigger next year.  That represents the largest cost-of-living adjustment to benefits in four decades.

Plan for a possible recession

The U.S. economy grew at a 2.6% annual rate in the third quarter but showed signs of a broad slowdown, as consumer and business spending faltered under the weight of high inflation and rising interest rates.

Think about increasing your emergency savings and curtailing your holiday spending. It’s more important than ever to stick to a budget and get your financial plan in order.

 

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