"Giving to charity can be a very powerful tax-savings tool. Check if you have any appreciated investment assets you could donate instead of cash," writes Jeff Witz, CFP.
2022 has been a challenging year for many. A lingering pandemic, high inflation, and struggling stock and bond markets have forced many investors to dip into emergency funds or adjust their approach to saving, spending, retirement plan distributions, and charitable gifting. When disruptions such as these occur, the end of the year presents a good opportunity to regroup, close out in the strongest position possible, and ready yourself for 2023. Here is a list of year-end items everyone should review. The sooner these items are addressed and adjustments made, the better position you likely will be in next year.
Is your emergency fund fully funded? If you tapped into your emergency fund for any reason this year, it is important to make sure the account is replenished. It is always a good idea to review your budget and determine whether your necessary spending has increased or decreased and then review your emergency fund to ensure it is properly funded. As a reminder, the general rule of thumb for an emergency fund is 3 months’ of necessary expenses saved in cash if you are a dual-income household. Boost it to 6 months if you are a single-income household or if one person earns significantly more than the other and their 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 end? 401(k) and 403(b) contributions must be made by December 31, 2022. The 2022 contribution limit for employee contributions is $20,500 ($27,000 if you are 50 years or older). Individual retirement account (IRA) contributions can be made up until the tax filing deadline in April 2023. The 2022 contribution limit for IRAs is $6000 ($7000 if you are 50 years or older).
Have you used all the money remaining in your dependent care or healthcare flexible spending accounts? Most flexible spending accounts (FSAs) are use-it-or-lose-it accounts, meaning money left over in the account at the end of the year is forfeited back to the plan, not back to you. Some employers do offer a grace period into next spring or a $500 carryover to the next year for health care FSAs, but most do not. Make sure you use this money so you aren’t leaving anything on the table.
Have you made contributions to your children’s 529 savings plan 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, 2022, to receive a 2022 tax deduction.
Have you designated all the gifts you planned to give this year? For 2022, the annual gift tax exclusion amount is $16,000 per person or $32,000 for a married couple. This means you can give cash or assets (such as investments) valued 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, 2022.
Have you made your charitable donations for the year? Giving to charity can be a very powerful tax-savings tool. Check if 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, 2022, to count toward your 2022 taxes.
Have any of your investments lost money this year? The stock market has struggled in 2022, and many investments have had significant declines in value. 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 2022 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 year end to count toward 2022.
Have you taken required minimum distributions? Under current tax law, if you are over age 72 years and have a pretax retirement account or have inherited an IRA, you need to make sure you have taken your 2022 required minimum distributions (RMDs)by December 31, 2022. The penalty for not taking an RMD is 50% of the RMD amount. Please note the RMD for IRAs inherited in 2020 and 2021 has been waived until 2023 for noneligible designated beneficiaries.
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 nice head start on making sure you close out 2022 on stronger financial footing.