Your Money: 3 Steps to Kicking Off the New Year Right

2021 is quickly coming to a close. Are you money-ready? 

At the end of every year, it’s wise to look closely at your finances and plan well to welcome in the new year with confidence. Checking each box now can save you headaches and money in the weeks and months ahead. These tasks include the ‘biggies’ like year-end tax planning (which absolutely must be completed before the clock strikes 12 on New Year’s Eve!), charitable giving, Medicare selections, and taking required minimum distributions (RMDs). I’ve also added some less apparent items that can still significantly impact your financial life. 

Here are my top 3 tips to help ring in the New Year right and begin 2022 on financially solid ground:

Plan for Tax Law Changes

Thanks to the Build Back Better Act, which was passed by the House of Representatives on November 19, 2021, and is now being considered by the Senate, the current cap on the state and local tax deduction (SALT tax limitation) is likely to increase—possibly significantly. The TJCA capped the deduction at $10,000 per year. The House plan allows unlimited write-offs for taxpayers earning less than ~$400,000/year, and then phases down the deduction for higher earners. The Senate will surely make some amendments before the bill is passed, but for those of us who live in the high-tax state of California, any change will help.

Another pending tax law change is the ‘death of the Back Door Roth’—2021 will be the last year this strategy is allowed, so take advantage of it while you can if it fits your needs. Also, the annual gift exclusion for 2021 is $15,000, but that will increase to $16,000 in 2022. Remember, the gift is per donor and per donee, which means a married couple can give someone $32,000 per year as of 2022. 

Make Smart Charitable Donations

When you turn 72, you are required to begin taking RMDs from your traditional IRA and 401(k) each year (see Tip #3). A Qualified Charitable Distribution (QCD) is one way to simultaneously fund your strategic giving plan and reduce your taxable income. If you’re over 70½, a QCD allows you to give up to $100,000/year to your charity of choice with pre-tax money. After you turn 72, the QCD counts toward your required minimum distribution. The result: though the QCD isn’t deductible, it can reduce your adjusted gross income (AGI) to lower your federal and state tax bill, as well as cut taxes on items tied to your AGI, such as Social Security benefits and Medicare premiums.

If you plan to make significant charitable contributions, a DAF or Donor Advised Fund, allows you to make a lump-sum donation to take advantage of the up-front charitable tax deduction in the current year. In essence, a DAF enables you to create a sort of private ‘foundation’ so you can take a tax deduction now (which can be especially helpful if you’ve inherited an IRA or need to offset taxes for appreciated stocks) and give later. One of my favorite DAF options is the Jewish Community Foundation of Orange County. Others to consider are Schwab CharitableFidelity Charitable, the Jewish National Fund, and DAFs offered by your university of choice.

To learn more about charitable strategies (including ‘bunching’ deductions into a single calendar year to exceed the standard deduction amount), see my blog post 3 tax-smart ways to make charitable gifts.

Pay Attention to Year-end Deadlines

There are myriad deadlines that come with December 31, and many of them can create massive and costly headaches if they are missed. Required minimum distributions from your qualified retirement account must be taken every year—in the right amount, from the right account. Make sure you take them! It’s also smart to verify that you have maxed out your retirement plan contributions (you can contribute additional funds up to the maximum as late as December 31); sell and realize any stock losses (tip: you can buy back what you sold after 31 days); and complete 2021 Roth conversions. And be sure to take any steps needed to manage income to avoid the IRMAA surcharge to Medicare Part B and D—sometimes reducing your income by a single dollar can make a real difference, and you’ll want to do everything you can to offset the 15% increase in Medicare Part B.

Year-end is never an easy time to focus on money. The holidays throw us a bit sideways with a long and sometimes overwhelming list of to-dos. But to begin the New Year with the greatest possible financial confidence, don’t let these essential financial tasks fall by the wayside. Inflation is rising, interest rates are climbing, and tax law changes are coming, so diligence is the key to long-term success. 

If uplifting news is your best motivation, there is some positive news to share, too: monthly Social Security benefits will increase by a whopping 5.9% in 2022 (the largest increase since 1982!), and the stock market, despite some wild volatility, has continued to rise. 2021 has done a great job of illustrating that a diversified portfolio is one of the most powerful tools to help meet your needs for the long term. What can we expect in 2022? I can predict anything but the future! But no matter which way the world turns, we are here to answer your questions, offer knowledgeable guidance, and help you grow the assets needed to pay for the life you were meant to live. We are always here to help!

Related: When Life Changes, Money Changes