5 Financial Moves You May Want to Make Before 2022

Buoy your retirement savings and reduce your tax liability

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A lot has changed in 2021, including, for many of you, your financial situation. With the end of the year approaching quickly, it’s a good idea to take stock of your finances and be sure you don’t miss your chance to make some potentially important decisions. Here are five things to consider doing before 2022, according to financial professionals. 

Put That Bonus Toward Your Future

Many employers sweetened the pot this year to attract or keep workers. If your boss added incentives to make sure you stayed put, or if you found a better-paying job, you may be getting your first (or a bigger) end-of-the-year bonus.

If you don’t need to use the bonus, consider putting it in your 401(k) plan, especially if your company matches your contributions. Not only will you be growing your retirement fund, but you’ll be lowering your taxable income come tax time since the money added is pre-tax. 

To add your bonus to a traditional 401(k), any changes to your contribution instructions will have to be made before the bonus is paid to you, so check with your employer or 401(k) provider for details on how to do that. Just make sure it won’t put you over the $19,500 contribution limit (or $26,000 if you’re at least 50 years old) allowed by the IRS for this year. (Employer contributions are tallied separately.)

If you aren’t in a traditional employer-provided 401(k) or miss your chance to change your contributions ahead of time, perhaps you have a traditional IRA or a Roth IRA. You have until the normal tax return filing deadline (so usually April 15) to add your bonus to either of these, and in the case of a traditional IRA, you will get a tax deduction for this year (unless you also have a 401(k) through your employer and make more than a certain amount.)

If you or your spouse left the workforce this year, that doesn’t have to mean a lost year of saving for retirement. Consider opening a spousal IRA, where money can be saved on behalf of the non-working spouse as long as the couple files taxes jointly. The contributions are deducted from taxable income when you file your tax return.

Take Your Retirement Money

If you're already retired and 72 or older with a 401(k) or traditional IRA, you might have chosen—if you were able to afford it—not to take any money from your account last year. The IRS suspended the required minimum distribution (RMD) rules and even said if you did withdraw, you could take advantage of a special last-minute provision letting you roll it back into your account. Maybe you wanted to avoid selling assets at lower prices or just didn’t feel comfortable withdrawing money with so much uncertainty about the economy.

But this year the rules apply again, and the IRS wants you to pay income taxes on that portion of your retirement money. If you don’t withdraw your required amount by Dec. 31 (or for those who turned 72 in the latter half of this year, April 1, 2022), you’ll face a major penalty: a 50% tax on the amount that isn’t withdrawn.

Get an Extra Break on Supporting Your Causes 

They say giving is receiving, and this year that’s especially true. Congress extended a 2020 pandemic-era provision that adds incentive to make donations to your favorite charity through the end of this year. Unlike before the pandemic, if you’re one of the vast majority of taxpayers who take the standard deduction on your tax return (rather than itemizing your deductions), you can still deduct up to $300 in cash contributions to qualifying organizations (and new this year, married couples filing jointly can deduct up to $600). Just be sure to make your donations by the end of the year and save your receipts.

And, if you happen to be able to afford to donate most or all of your income to charity, there’s another incentive. The temporary provision allows those who itemize their deductions to deduct up to 100% of their adjusted gross income, instead of the usual maximum of 60%, in cash contributions to qualified charities. Older people, especially, may want to consider this special provision if they’re planning a large donation this year and have those RMDs we mentioned above. 

“Annual charitable giving allows you to pass on some benefits and reduce the size of your estate for future growth and future taxing,” said Lauren Wybar, senior wealth advisor with Vanguard.

Actually Look for Losses

Many financial markets have rallied this year, but if some of your investments have lost money with the recent volatility, there is a tax strategy you may want to employ before the end of the year. If you have sizable capital gains you’ll have to pay tax on, you may want to consider selling some money-losing investments to offset the gains. You can lower your taxable income by up to $3,000 in 2021 by doing this, and potentially more in future years, depending on the difference between your gains and losses.

Just make sure you are really done with those investments, since the wash sale rule prohibits you from buying them back within 30 days. 

“You’ll lose the tax benefit if you buy back what you sold within 30 days,” warned Renee Hanson, private wealth advisor at Ameriprise Financial. 

Pay Down That Credit Card Debt

Ideally you never have to run a balance on your credit card, but if you do have one, there’s even more urgency to pay it off, or at least down. After leaving the benchmark interest rate at virtually zero since the start of the pandemic, the Federal Reserve last week signaled that it may raise it three times next year (by a total of 0.75 percentage point) to try to rein in soaring inflation. The first increase may come as soon as April

While nothing actually changes at the stroke of midnight on New Year’s, the earlier you start, the more likely you are to pay your balance off before the first rate hike or soon thereafter. Even though next year’s increases may raise your monthly payment by just a few dollars, the benchmark rate is only expected to go up, reaching 2% or 3% by 2024.

The same principle applies to any debt you have with a variable rate influenced by the fed funds rate, including home equity lines of credit. And if you can’t pay them off quickly, you may want to try to convert to a fixed rate of interest.

And Then in 2022 … 

After you wrap up this year on the best footing possible, there are a few things you should consider as you prepare to file your taxes in 2022. 

First, if you qualify, you can still get your 2021 stimulus check for up to $1,400 per person if you haven’t already received it, so make sure to claim it on your 2021 tax return. And even if you have, if you had a baby in 2021, the IRS likely didn’t account for that qualifying dependent because your check was based on a previous year’s tax return, so that’s another $1,400 that may be due to you. 

“You’ll have to claim that one since there’s no way the IRS would have known you had a baby,” said Mark Steber, chief tax information officer at Jackson Hewitt Tax Service.

Similarly, if you had a baby in 2021, even at 11:59 p.m. on Dec. 31, you likely qualify to get the 2021 federal child tax credit, which went up to $3,600 from $2,000 per child, so make sure to claim that too.

“That’s a big, fat, nice credit to get this year,” Steber said.

Have a question, comment, or story to share? You can reach Medora at medoralee@thebalance.com.

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