Financial Planning

Annual Financial To-Do List

Things you can do for your financial future as the year unfolds.

What financial, business, or life priorities do you need to address for the coming year? Now is an excellent time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:

Can you contribute more to your retirement plans this year? In 2022, the contribution limit for a Roth or traditional individual retirement account (IRA) is expected to remain at $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA. With a traditional IRA, you can contribute if you (or your spouse if filing jointly) have taxable compensation, but income limits are one factor in determining whether the contribution is tax-deductible.1

Keep in mind, this article is for informational purposes only and not a replacement for real-life advice. Also, tax rules are constantly changing, and there is no guarantee that the tax landscape will remain the same in years ahead.

Once you reach age 72, you must begin taking required minimum distributions from a traditional Individual Retirement Account in most circumstances. Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

To qualify for the tax-free and penalty-free withdrawal of earnings, Roth 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal can also be taken under certain other circumstances, such as the owner’s death. Employer match is pretax and not distributed tax-free during retirement.

Make a charitable gift. You can claim the deduction on your tax return, provided you follow the Internal Review Service guidelines and itemize your deductions with Schedule A. The paper trail can be important here. If you give cash, you should consider documenting it. Some contributions can be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity this year but only end up gifting $500, you can only deduct $500.2

Make certain to consult your tax, legal, or accounting professional before modifying your record-keeping approach or your strategy for making charitable gifts.

See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to write off expenses linked

to the portion of your home used to conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with the tax rules as they relate to home-based businesses.3

Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,650 contribution for 2022 if you are single; $7,300 if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.4

If you spend your HSA funds for non-medical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

Pay attention to asset location. Tax-efficient asset location is one factor that can be considered when creating an investment strategy.

Review your withholding status. Should it be adjusted due to any of the following factors?

* You tend to pay the federal or state government at the end of each year.

* You tend to get a federal tax refund each year.

* You recently married or divorced.

* You have a new job, and your earnings have been adjusted.

Consider consulting your tax, human resources, or accounting professional before modifying your withholding status.

Did you get married in 2021? If so, it may be an excellent time to review the beneficiaries of your retirement accounts and other assets. The same goes for your insurance coverage. If you are preparing to have a new last name in 2022, you may want to get a new Social Security card. Additionally, retirement accounts may need to be revised or adjusted?

Are you coming home from active duty? If so, go ahead and check on the status of your credit and any tax and legal proceedings that might have been preempted by your orders.

Consider the tax impact of any upcoming transactions. Are you preparing to sell any real estate this year? Are you starting a business? Might any commissions or bonuses come your way in 2022? Do you anticipate selling an investment that is held outside of a tax-deferred account?

The most significant proposed changes

Reduce the current $11.7 million federal estate tax exemption to $3.5 million

The estate tax exemption represents the amount each person is permitted to pass on free of any federal estate tax at death.1 In 2010, the exemption was raised to $5 million and later to $11.7 million in 2018. The Sanders/Whitehouse proposal calls for decreasing the exemption to $3.5 million and indexing it for inflation. If passed, this will result in more tax for many families at death. Those with an estate worth less than $3.5 million will not be impacted.

Reduce the current lifetime gift tax exemption to $1 million

The current federal gift tax law gives each person an $11.7 million lifetime gift tax exemption, which is the amount they can give away during their lifetime before any gift tax must be paid. If passed, all cumulative gifts made during life above the $1 million exemption would face a payable gift tax. Gifts made prior to enactment to the bill will be counted against one’s new $1 million lifetime exemption.2

Increase the rate of taxation on federally taxable estates

Current federal estate tax law states that estates which exceed the exemption are subject to tax at the flat rate of 40%. For example, a $20 million estate with have an estate tax payable of $3,320,000. If passed, the proposed increase on the rate of estate tax would move to 45% for estates valued between $3.5 million and $10 million, 50% for estates over $10 million but less than $50 million, 55% for estates between $50 million and $1 billion, and 65% for estates over $1 billion.1

Limit total annual exclusion gifts

Currently, there is not an amount limit to how many gifts of $15,000 per year a person can make, or the number of gifts a recipient can receive from donors. Under the proposed act, the annual exclusion is reduced to $10,000 per annum, and a donor is limited to giving away just $20,000 in total each year. Recipient’s can’t receive more than $10,000 in total a year.3

Limit generation-skipping transfer trusts to a term of 50 years

The generation skipping transfer tax (GSTT) is a tax imposed on transfers to skip beneficiaries. Under current law, individuals can transfer up to $11.7 million to a long-term trust that benefits successive generations of a family. The trust can go from generation to generation without ever being subject to estate or gift taxes. The proposed act caps the duration of trusts that would be tax exempt at fifty years. After fifty years, distributions from the trust to a person more than one generation removed from the grantor would be subject to the generation-skipping transfer tax (GST).3

When could this bill be enacted?

The projected earliest date that the Act could become law would be in October of 2021 as a part of the Budget Reconciliation process.

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Investment advisory services are offered through Trek Financial, LLC., an SEC Registered Investment Adviser.  Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

Sources, August 11, 2021

2-, January 22, 21, July 31, 2020, September 8, 2021

5-, May 3, 2021


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