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Year End Financial Checklist 2022

Retirement Taxes Family

INCOME TAXES  

Several provisions put into place during the pandemic are returning to normal, such as the 60% adjusted gross income (AGI) limit on charitable cash contributions and the Child Tax Credit and Child Care and Dependent Tax Credits, where fewer will qualify and the amounts are reduced. These changes may increase your 2022 tax bill.

  •  Crypto Losses You must report crypto transactions again this year and they may generate capital losses for 2022. Be sure to communicate with your tax and financial advisor if you are active in the crypto markets.
  • Third Party Payments Reported to IRS Self-employment or “side hustle” income payments from PayPal, Venmo and other third-party apps will be reported to the IRS on transactions exceeding $600 this year. The threshold was previously for taxpayers with 200 transactions totalling over $20,000. Many more will receive Form 1099-Ks as a result of this change so you will need to be exact when reporting this type of income.
  • Review Tax Bracket for 2023 Think about whether you will be in a higher or lower tax bracket next year. If you will be in a higher bracket, take capital gains and income in this tax year, if possible, and remember to increase W-2 federal withholding for 2023.

INVESTMENT STRATEGIES

  • Rebalance This year’s market volatility has up-ended many portfolios. Examine whether your portfolio allocations are consistent with your investment objectives and re-balance if necessary to bring your portfolio in alignment with your goals. 
  • Tax Loss Harvest Equity market declines have provided some opportunities to “tax loss harvest.” This strategy is when you sell an underperforming asset at a loss and use that loss to reduce capital gains and up to $3,000 of ordinary income in the current tax year. You reinvest the money from the sale into another security which meets your investment needs and asset allocation strategy. You can carry-forward extra capital losses indefinitely, and use them to offset realized investment gains plus up to $3,000 of regular income each year.

 RETIREMENT ACCOUNTS

  •  Know the Maximums Check that you have maxed out your contributions on employer sponsored 401(k) plans - $20,500 in 2022, plus $6,500 if you are 50 or older. At minimum, ensure that you have met your employer match on the 401(k) plan, as that is extra income for you. These contributions must be made by December 31st, while IRA contributions can be made until the regular tax filing deadline in 2023.  The maximum IRA contribution is $6,000, plus $1,000 if you are 50 or older. 
  • Review Allocations Too often employees leave investment allocation in an employer-sponsored plan to the default selection, which may not be in your best interest. We are happy to review asset allocations for you in your retirement plans.
  • HSA Contributions For 2022, the maximum HSA contribution is $3,650 for individuals and $7,300 for families and an additional $1,000 for individuals age 55 or older. Remember HSA savings can be triple tax free – contributions, growth and withdrawals are all tax free provided they are used for qualified medical expenses. 
  • Required Minimum Distributions (RMDs) If you are required to take RMDs, make sure those are taken by December 31st as the penalty for missing deadline is 50% of the required RMD. Communicate with your tax and financial advisor to optimize the tax withholding amounts.
  • Roth Conversions Consider a Roth conversion in a year when the markets are down or you are in a lower tax bracket. This is a transfer of retirement funds from a traditional IRA tax-deferred account to a tax-exempt Roth IRA account. You pay ordinary income taxes now on the amount converted, but receive withdrawals in retirement that are tax-free (including any future investment gains).
  • Roth Accounts for Your Children You can establish a Roth IRA for your child or grandchild as a custodial account and fund it up to the amount your child earned from a job.  This will provide a tremendous head start for them on retirement savings due to compound investment growth.
  • Beneficiary Designations Check beneficiary designations. These can be forgotten after a life changing event such as a wedding, divorce or death.

 GIFTING 

                                                                                                                     

  • Group Donations into Single Tax Year With higher standard deduction amounts, charitable donations may not be eligible for tax deductions. Consider “bunching” charitable donations in one year to surpass the standard deduction amount as suggested by the chart above (yellow line represents standard deduction).
  • Donor Advised Funds (DAF) Consider contributing appreciated securities to a DAF.  You get an immediate charitable deduction in the year of the contribution; you avoid paying taxes on the capital gains and you can make grants to charities for many years in to the future. This is a another way to bunch donations and spread out giving over many years.
  • Family Gifts Gifts up to $16,000 per recipient are excluded from lifetime gift and estate tax exemptions. If family gifting is part of your overall financial strategy, consider gifting now and again in early 2023 to enable recipients to take advantage of lower market valuations.

529 PLANS There is tremendous power in saving early for college. The cost of college continues to grow at a hefty rate, so making any contribution towards your child’s or grandchild’s education fund is recommended. Even if your contribution is lighter this year, consider adding to your 529 plan to take advantage of depressed equity valuations and one more additional year of tax free growth.

YEAR-END BONUSES These one time payments should have a purpose. Before you receive any bonus, think about which financial goals you can meet with this money. Consider paying off high interest debt first (credit card, or variable rate margin or home equity loans) and then allocating a portion to a longer-term goal such as new home purchase or education funding. 

PLANNING FOR THE NEW YEAR Year end is a good time to review annual spending and assess income needs. Most credit card companies issue a year end report broken into expense categories. We fill most of our days earning money and far less time focusing on how we spend it. Consider investing a little time at year end to review where your dollars are going. It might surprise you!

Please feel welcome to contact us with any questions at (617) 622-1500

Sandy Cove Advisors does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.