2022 has been a tough 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 savings, spending, retirement plan distributions, and charitable donations. When such disruptions occur, the end of the year presents a good opportunity to regroup, close in the strongest position possible, and prepare for 2023. Here is a list of year-end elements that everyone world should consider. The sooner these items are addressed and adjustments made, the better your position will likely be next year.
Is your emergency fund fully funded? If you’ve dipped into your emergency fund for any reason this year, it’s important to make sure the account is replenished. It’s always a good idea to review your budget and determine if your necessary expenses have increased or decreased, then review your emergency fund to make sure it’s properly funded. As a reminder, the general rule for an emergency fund is 3 months of necessary expenses saved in cash if you are a two-income household. Increase 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 used to maintain your family’s standard of living.
Have you maxed out your retirement accounts or are they on track to max out by the end of the year? 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 or older). Individual Retirement Account (IRA) contributions can be made up until the tax filing deadline of April 2023. The 2022 contribution limit for IRAs is $6,000 ($7,000 if you are 50 years or older).
Have you used all the money left in your flexible spending accounts for dependent care or health care? Most Flexible Spending Accounts (FSAs) are use-it-or-lose-it accounts, which means that any money left in the account at the end of the year is returned to the plan and not to you. Some employers offer a grace period until next spring or a $500 deferral to the next year for health care FSAs, but most do not. Be sure to use that money so you don’t leave anything on the table.
Have you contributed to your children’s 529 savings accounts? As the cost of a college education continues to rise, it’s important to start saving as early as possible. 529s offer great tax benefits if you’re saving for college or other post-high school education opportunities. Many states offer an income tax deduction for contributing to a 529 account. Sometimes these tax savings can be substantial. Contributions must be paid before December 31, 2022 to benefit from a 2022 tax deduction.
Have you named 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 gift money or assets (such as investments) valued up to these amounts to an unlimited number of people without having to worry about gift tax. Donating can be a great way to remove assets from an estate if future property taxes are a concern. Donations must be made by December 31, 2022.
Have you made your charitable donations for the year? Giving to charity can be a very powerful tax-saving tool. Check to see if you have any appreciated investment assets that you could donate in lieu of cash. Donating appreciated investments allows you to avoid paying capital gains taxes when you sell the investments, and you can 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 tax. However, be aware that with the increase in 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 be considered for your 2022 taxes.
Did any of your investments lose money this year? The stock market has struggled in 2022 and many investments have seen significant declines in value. If investments in your taxable accounts are in the red, you may consider selling those investments to reap the loss. The harvest of tax losses can be used to offset gains elsewhere or potentially reduce your 2022 tax bill. If your captured losses exceed your realized gains, you will have a net capital loss. Up to $3,000 ($1,500 if married and filing separately) of net capital losses can be deducted from ordinary income, including salary, self-employment income, and interest income . Any excess loss above these amounts can be carried forward to future years to offset gains or be deducted from income. Sales to capture losses must occur before the end of the year to count towards 2022.
Did you take the required minimum distributions? Under current tax law, if you are over 72 and have a pre-tax retirement account or inherited an IRA, you must ensure that you have taken your 2022 rrequired minimum distributions (RMDs) by December 31, 2022. The penalty for not taking an RMD is 50% of the RMD amount. Please note that the RMD for inherited IRAs in 2020 and 2021 has been waived until 2023 for ineligible named beneficiaries.
Do you need to update beneficiaries? If there has been a major life change, 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 of your retirement accounts and your 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 will likely be more things to check, but this list should give you a good head start to ensure you end 2022 on a stronger financial footing.