Year End Money Moves

It’s time for the annual year-end ritual of making smart money moves. Like last year, there are some unique aspects to the planning process due to various government efforts amid COVID.

Think About 2021 Taxes NOW: You can kiss those IRS tax filing extensions goodbye. In 2022 we will return to the April 15th deadline, which means now is the perfect time to determine where you stand. Use the IRS’s withholding estimator to see if you have had enough money set aside to pay your tax bill in April. If not, notify your payroll department to increase your withholding through the end of the year. If you are not working or are self-employed, you may want to make an estimated tax payment to reduce or eliminate potential tax penalties.

You should also keep end of year documents including: Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance child tax credit payments; Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the recovery rebate credit; and Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance premium tax credits for Marketplace coverage.

Calculate Remote Work Tax Implications: For a second year, there will be a tax headache for those who moved outside of their cities or states of residence. You will need to compile the number of days worked in any states, cities, counties, municipalities, school districts or other jurisdictions you’ve worked remotely in during 2021. Then check your primary state’s rules about other jurisdictions and make the adjustments to tax withholding that are needed.

Be Careful With the Home Office Deduction: The 2017 Tax Cuts and Jobs Act eliminated the employee business expense deduction through December 31, 2025. However, if you are self-employed, then the home office deduction is still available. To qualify, there must be exclusive use of a portion of the home for conducting business on a regular basis and the home/apartment must be the taxpayer's principal place of business.

Evaluate Outstanding Student Loans: Federal student loan forbearance concludes on January 31, 2022. To prepare, go to studentaid.gov, where you will be able to update your contact information, review a Loan Simulator to find a repayment plan that’s best for you, and consider an income-driven repayment (IDR) plan, which could make your payments more affordable, but also may add time to the loan.

Consider a Roth Conversion: If you had lower income in 2021, it may be time to convert from a traditional IRA into a Roth, because your tax liability could be lower today, than in the future. The conversion amount adds to your taxable income, so pay attention to IRS tax brackets. For this to work, you need to have non-retirement funds available to pay the tax due. Once you convert to a Roth, your money will grow tax-free and when you retire and withdraw the money, there will be no tax due. Because Roth plans are not subject to Required Minimum Distributions (RMDs), many use them to help control future taxation of Social Security benefits and/or increased costs of Medicare, which are income tested.

About Those RMDs…: The one-year respite from taking RMDs is OVER. That means that you need to take your RMD from retirement accounts before the end of the calendar year, or else you will pay a whopping penalty, 50 percent of the amount that you should have withdrawn. If you have multiple IRAs, you only need to take one RMD that covers the total for all of those accounts.

Slash Your Tax Bill with Uncle Sam’s Help: The best way to reduce your tax liability is to maximize your pre-tax retirement plan contributions before the end of the year. Most employer plans allow you to increase your contributions but be sure to readjust after the New Year.

Rebalance Thoughtfully: If you itemize and have a taxable investment account, you can sell investments with losses to offset gains during the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years.