2021 Year-End Financial Planning Checklist
10 Suggestions to Help You Stay on Track
Presented by Marianna Goldenberg
Although 2021 has been a year of unexpected changes, one routine has remained consistent: the fourth quarter means it’s time to begin organizing your finances for the new year. To help you get started, here’s a checklist of key topics to think about.
1) Max out retirement contributions. Are you taking full advantage of your employer’s match to your workplace retirement account? If not, it’s a great time to consider increasing your contribution. If you’re already maxing out your match or your employer doesn’t offer one, boosting your contribution to an IRA could still offer tax advantages. Keep in mind that the SECURE Act repealed the maximum age for contributions to a traditional IRA, effective January 1, 2020. As long as you’ve earned income in 2020, you can contribute to a traditional IRA after age 70½—and, depending on your modified adjusted gross income (MAGI), you may be able to deduct the contribution.
2) Refocus on your goals. Did you set savings goals for 2021? Evaluate how you did and set realistic goals for next year. If you’re off track, we’d be happy to help you develop a financial plan.
3) Spend flexible spending account (FSA) dollars. If you have an FSA, note that the Internal Revenue Service (IRS) relaxed certain “use or lose” rules in 2020 because of the pandemic. This rule has not been permanently changed, so be sure to spend down your account before your 2022 deadline to avoid losing your savings!
If you don’t have an FSA, you may want to calculate your qualifying health care costs to see if establishing one for 2022 makes sense.
4) Manage your marginal tax rate. If you’re on the threshold of a tax bracket, you may be able to put yourself in the lower bracket by deferring some of your income to 2022. Accelerating deductions such as medical expenses or charitable donations into 2021 (rather than paying for deductible items in 2022) may have the same effect.
Here are a few key 2020 tax thresholds to keep in mind:
The 37 percent marginal tax rate affects those with taxable incomes in excess of $523,601 (individual), $628,301 (married filing jointly), $523,601 (head of household), and $314,151 (married filing separately).
The 20 percent capital gains tax rate applies to those with taxable incomes in excess of $441,851 (individual), $501,601 (married filing jointly), $473,751 (head of household), and $250,801 (married filing separately).
The 3.8 percent surtax on investment income applies to the lesser of net investment income or the excess of MAGI greater than $200,000 (individual), $250,000 (married filing jointly), $200,000 (head of household), and $125,000 (married filing separately).
5) Rebalance your portfolio. Reviewing your capital gains and losses may reveal tax planning opportunities; for example, you may be able to harvest losses to offset capital gains.
6) Make charitable gifts. Donating to charity is another good strategy worth exploring to reduce taxable income—and help a worthy cause. Take a look at various gifting alternatives, including donor-advised funds.
7) Form a strategy for stock options. If you hold stock options, be sure to develop a strategy for managing current and future income. Consider the timing of a nonqualified stock option exercise based on your estimated tax picture. Does it make sense to avoid accelerating income into the current tax year or to defer income to future years? If you’re considering exercising incentive stock options before year-end, don’t forget to have your tax advisor prepare an alternative minimum tax projection to see if there’s any tax benefit to waiting until January.
8) Plan for estimated taxes and required minimum distributions (RMDs). Both the SECURE and CARES acts affected 2020 tax planning and RMDs by allowing you to waive your distribution. However, there is no waiver for 2021. This means that you must take your RMD no later than December 31, 2021 in order to avoid a 50% penalty tax.
9) Adjust your withholding. If you think you may be subject to an estimated tax penalty, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage of this is that withholding is considered to be paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. You can also use this strategy to make up for low or missing quarterly estimated tax payments. If you collected unemployment in 2021, remember that any benefits you received are subject to federal income tax. Taxes at the state level vary, and not all states tax unemployment benefits. If you received unemployment benefits and did not have taxes withheld, you may need to plan for owing taxes when you file your 2021 return.
10) Review your estate documents. Review and update your estate plan on an ongoing basis to make sure it stays in tune with your goals and accounts for any life changes or other circumstances. Take time to:
Check trust funding
Update beneficiary designations
Take a fresh look at trustee and agent appointments
Review provisions of powers of attorney and health care directives
Ensure that you fully understand all of your documents
Be Proactive and Get Professional Advice. Remember to get a jump on planning now so you don’t find yourself scrambling at year-end. Although this list offers a good starting point, you may have unique planning concerns. As you get ready for the year ahead, please feel free to reach out to us to talk through the issues and deadlines that are most relevant to you.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Marianna Goldenberg is located at CURO Wealth Management: 1705 Newtown-Langhorne Road, Suite 1, Langhorne, PA 19047 and can be reached at 215-486-8350. Securities and advisory services offered through Commonwealth Financial Network,® Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency