I know that it is only the end of October and we are talking about Christmas shopping and being concerned about getting those great gifts. I cannot think of the holiday season without immediately thinking of year-end recommendations for your financial wellbeing. Since I am also concerned this year with “everything” seeming to take longer and encountering problems, it might be a good idea to start your year-end planning earlier this year.
Consider the list below and follow through on any items that you need to act on soon:
1 – If you are eligible for a health savings account (HSA) because of having a high deductible medical plan through your employer or the Marketplace, consider fully funding for the year. While your employer may be putting a few hundred or even a few thousand dollars into it, you have the option of funding the balance either through payroll deduction or by writing a check and depositing the funds. If your employer’s financial institution does not allow you to write a check and deposit it into the existing account, you can open a separate HSA account for your funds. Make sure you do not exceed the maximum annual contribution for the two accounts combined.
The contribution limits for 2021 are $3,550 for one-person coverage and $7,100 for family coverage. You can make an additional $1,000 contribution per person over the age of 55. HSAs are not a use-it-or lose it. You can carry over funds in an HSA for as long as you want to.
Putting funds into your HSA does provide you with a tax deduction. If you put $2000 into the HSA and are in the 22% federal bracket, it would save you $440 in federal taxes this year. If you have a medical bill to pay, we often recommend that individuals place the funds into the HSA first and then pay the medical bill out of the HSA account. Most individuals cannot take a deduction for medical expenses on their tax returns. By depositing the funds into the HSA account first, you effectively allow yourself to have a medical expense for which you got a tax deduction.
2 – Some individuals still have a flexible spending account (FSA) through their employer. With it being open enrollment time for many, you should consider funding this plan for next year. The FSA is a use-it-or-lose-it account. You want to fund it to the extent of what you know your average expenses are.
If you pay $50 a month for prescriptions, you put $600 a year into the account. If you pay $500 for family dental cleanings per year, you add that $500 to it. If you know your routine annual exams and lab work will cost you $300 for the year, add in that $300. Even if you only do the minimum for what you know and do not get all your medical expenses covered, you are still getting some tax benefit. If you put that $1400 from our examples above and are in the 22% tax bracket, you would save $308 in federal taxes.
Find ways to use up the balance if you funded the account for 2021 and have not used all the funds. Do you need an eye exam, or maybe time for a new pair of glasses? Are you overdue for a dental cleaning? Fill prescriptions at the end of the year rather than the first week in January. Get overdue lab work done. Make these appointments soon since it seems that many facilities are four weeks or more out for appointments. Or – maybe you have incurred the medical costs and just not requested the reimbursement. If so, get that done.
3 – Have you made your charitable contributions for the year? For 2021, even those who do not itemize can deduct $300 (if single) or $600 (if married filing joint) of cash contributions made. It must be in cash; contributions cannot have been merchandise for this deduction. Cash, check, credit card, or payroll deduction all count for this above-the-line deduction. The donations of goods and cash contributions above the $300/$600 limits can still be taken if you itemize.
4 – Have you taken your required minimum distributions (RMD) from retirement accounts? Traditional IRAs, 401(k)s, 403(b)s, 457, and all the other employer plans require a specific dollar amount to be taken out of the account. RMDs start in the year you turn age 72, under the new rules that started January 2020 or when you turned 70½, under the old rules before January 2020. Each type of account has a distribution requirement. If you have more than one IRA, you can take the total amount required from only one or spread it out over more than one. If you have an IRA and a 401(k), you must take distributions from each account.
These distributions must occur before December 31st, or you will be subject to a 50% penalty on the amount you should have taken and failed to take. You must make sure to request your distribution in time for it to occur before the end of the year. We recommend you do not wait. In fact, we generally set individuals to take these RMDs in early January to avoid worrying about them throughout the year.
5 – Have you not yet taken your RMD and also want to make charitable contributions? Consider arranging with your financial institution to do a qualified charitable distribution (QCD). The funds are taken directly from your IRA and given to the charity. The result – you do not have to claim the RMD as income on your tax return. You will also not get to take the charitable contribution, but those that do not itemize would not have been able to take that deduction anyways.
Take the example of having an RMD of $10,000. What impact would not claiming that $10,000 of income on your tax return do? With a lower AGI, would you avoid higher Medicare premiums? Maybe less of your Social Security is now taxable? Do you now qualify for benefits such as HEAP, the enhanced STAR exemption, or financial assistance for lower medical bills? Having a lower AGI can impact many other financial responsibilities you have.
6 – Have children in college and have a 529 account? Consider whether you should take a distribution out of the 529 account to cover expenses paid earlier in the year. The rules surrounding 529 distributions require them to be taken in the same year that the expenses were incurred to avoid taxes on the distribution. If you also qualify for the education credits, be careful about how much you take out of the 529 because it can leave you unable to receive the education tax credit.
7 – If you are interested in doing a 2021 Roth conversion, this must be completed before 12/31/2021. Most financial institutions require that Roth conversions be initiated by mid-December to ensure completion before year-end. While you have until April 15, 2022 to make your 2021 IRA contributions, any conversions must be done before the end of the year. If you have done one conversion this year, nothing prevents you from doing a 2nd one if it makes sense for you to do so.
8 – Tax harvesting also needs to be completed before 12/31/2021 to count for 2021. If you have non-retirement investments that have a loss and you want to claim that loss on your tax return, you need to sell that investment before year-end to have the ability to claim the loss.
With the possible changes to capital gain rates coming in 2022, it might also make sense for some to cash in on capital gains this year. The current tax plans being discussed are that anyone with less than $400,000 (single) or $450,000 (married filing joint) of income is not going to see a change in their capital gains rates. It might make sense for those over that income level to incur those capital gains taxes this year rather than in the future.
Riverside Income Taxes works hard to help you manage your tax liability for the current year and think more long-term. While there are not a lot of deductions left for individuals, there are still some tax strategies available for you to take advantage of. If you need more guidance on any strategies discussed above, please feel free to reach out to us.
