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Year-End Financial Planning: Key Considerations


As we approach the end of the year, it's crucial to review your financial situation and plan for the future. This process is not just about numbers, it's about maximizing tax benefits, managing your income effectively, and identifying opportunities for savings. By taking proactive steps, you can ensure you are well-positioned for success in the coming year.


Tax Planning Strategies

Do you have unrealized investment losses in your taxable accounts? Consider realizing these losses to offset gains or write off up to $3,000 against ordinary income. If you hold investments subject to end-of-year capital gain distributions, explore strategies to minimize your tax liability.


If you're subject to Required Minimum Distributions (RMDs), remember that RMDs from multiple IRAs can generally be aggregated, but inherited IRAs must be handled separately. RMDs from employer retirement plans usually need separate calculations and withdrawals, with the exception of 403(b) plans, which can be aggregated.


If you anticipate a future income increase, consider making Roth IRA, Roth 401(k) contributions, or Roth conversions to minimize future tax liabilities. Eligible individuals might also consider Roth employer matching contributions or making after-tax 401(k) contributions. If you're 59.5 or older, accelerating traditional IRA withdrawals could help fill up lower tax brackets.


If your income is likely to decrease, focus on strategies to minimize current tax liabilities, such as traditional IRA and 401(k) contributions instead of Roth accounts. Utilize any current or carryforward capital losses to offset gains or reduce up to $3,000 from ordinary income.


Income & Bracket Management

Understanding your position in the tax bracket is crucial. It can help you strategize income deferral or deduction acceleration, potentially reducing your tax liability. Essential tax thresholds to consider:

  • Taxable income below $191,950 ($383,900 if married filing jointly) places you in or below the 24% tax bracket; exceeding this moves you into the 32% bracket.

  • Taxable income above $518,900 ($583,750 if MFJ) subjects long-term capital gains to a higher 20% rate.

  • Modified Adjusted Gross Income (MAGI) over $200,000 ($250,000 if MFJ) may incur a 3.8% Net Investment Income Tax.


If you're on Medicare, review IRMAA surcharges impacting Medicare Parts B & D. Charitably inclined individuals should consider gifting appreciated securities or making Qualified Charitable Distributions (QCDs) for tax efficiency. Bunching charitable contributions to surpass the standard deduction ($14,600 if single, $29,200 if MFJ) might enable itemization in certain years.


Windfalls and Business Owners

Are you expecting a significant windfall, like an inheritance or bonus? It's crucial to review tax withholdings to determine if estimated payments are needed. Business owners should proactively consider the rules surrounding the Qualified Business Income (QBI) Deduction. Evaluating whether Roth or traditional retirement plans better suit your taxable income and QBI is a responsible step towards financial planning.


Deferring or accelerating business expenses could impact your overall tax liability. Most retirement plans must be established before the year ends, though exceptions like solo 401(k)s and SEP IRAs exist if following specific rules. Changes in marital status by December 31st can also affect your tax liability.


Savings Opportunities

Can you save more? Utilize Health Savings Accounts (HSAs), contributing up to $4,150 ($8,300 for families), with an additional $1,000 for those aged 55+. Employer retirement plans typically allow for increased savings; check the plan provider for deadlines. The maximum salary deferral to an employer plan is $23,000, with an extra $7,500 catch-up contribution for those 50+.


For those eyeing 529 accounts, you can contribute up to $18,000 annually or a lump sum of $90,000, treating it as spread over five years for gift tax exclusion. Portions of unused 529 funds may be transferable to the beneficiary's Roth IRA, subject to rules and limitations.


Flexible Spending Accounts and Other Considerations

Do you have an FSA balance? Employers may offer options like rolling over $640 of unused funds or a grace period until March 15th. Dependent Care FSAs have other deadlines. Have you met your health insurance deductible? Consider incurring additional medical expenses before it resets.


It's important to review your estate plan regularly, especially if there have been changes in your family, heirs, or significant asset transactions. Identifying any gifts up to the annual exclusion amount of $18,000 per donee for gift tax exclusion is also a key step. Parents of college-bound children should explore financial aid planning strategies to maximize aid packages. Stay updated on new laws that could impact your financial plan, effective next year.


Conclusion

Effective year-end financial planning can significantly improve your financial well-being. By implementing the strategies discussed, you can confidently move forward into the new year with a solid financial foundation.


WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen

 

Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.

 


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