Moves to Make Before Tax Time

As you clean up the corks and streamers from New Year’s celebrations, finances may not be top of mind. With the holiday season fuss, many people forget to check on year-end to-dos in December. Good news: there’s still time to make some moves that can positively impact your 2021 tax situation and your overall financial health.

IRAs can be opened and funded this year before April 15, 2022 (or October 15 for SEPS, SIMPLEs, and 401(k)s) to count for 2021. The deductibility of these contributions depends on the type of IRA as well as whether you are enrolled in a workplace retirement plan. Additionally, you may be ineligible to contribute based on your income—check with your tax preparer to ensure that you are eligible to make a contribution, and whether or not the contribution will be deductible. Keep in mind that employee contributions to most workplace retirement accounts, including 401(k) must be made by year’s end to count for that calendar year. There are exceptions, so check with your human resources department if needed.

HSAs are tax-advantaged accounts that allow people in high-deductible health plans to save additionally for medical expenses. The IRS does not levy taxes on HSA contributions, distributions, or earnings. You can open and fund an HSA before April 15, 2022 to qualify for 2021, with a maximum contribution of $3,600 for an individual account and $7,300 for a family.

Unused HSA contributions roll over from year to year and accumulated savings can be invested in a HSBA brokerage account. By the age of 65, the accrued savings are not restricted to qualifying medical expenses and can be taken out for general living expenses as if it were a retirement account, but are taxable. Talk to your advisor to see if an HSBA is appropriate.

Employees participating in Health Care FSAs and Dependent Care FSAs may have more flexibility for rolling over or spending funds in 2022. Typically, unused FSA funds are not allowed to roll over into the next year; however, the IRS is allowing employers to offer a grace period for spending unused 2021 funds in 2022, or to allow participants to roll over their entire 2021 balance to this year.  Check with your employer to confirm if they are offering either option.

The beginning of the year lends itself to some more general tasks that can also make an improvement
in your budget and cash flow.

Look at a monthly bank statement or credit card bill to identify subscriptions you are being billed for but may have forgotten about. Evaluate whether the subscription still provides value and cancel if it doesn’t. Apps like Truebill can assist in this process, but it’s also easy to complete manually.

While many of us contribute money to workplace retirement plans through an automated paycheck deduction, we don’t always build our personal savings accounts in the same way. Consider setting up an automated transfer from your checking account to your savings account once your direct deposit clears. You’ll be amazed at how quickly savings can grow when the process is automatic!

The beginning of the year is an excellent time to start or revisit a budget. By keeping spending in check, a budget can free up funds for retirement savings, a special goal and more. If you don’t know where to get started, try an app like Mint that aggregates your financial information. It provides an informed picture of your spending and allows you to set limits for spending categories. Additionally, You Need a Budget, or YNAB, is a no-frills website that provides a straightforward budgeting program, and offers lots of free, helpful content to educate and motivate you.

Finally, if you’re still having a difficult time getting your financial life together in the new year, don’t forget to file a tax return extension by April 18, 2022. You can file an extension starting in March.

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