End-of-Year Financial Checklist

Written by: Kate Redden, CFP®, ChFC®, CKA®, Regional Director, Partner

The end of a year traditionally is the time to make resolutions for the new year ahead. This applies as much to your financial life as it does to all those personal goals you promise yourself you’ll attend to. Financially speaking, though, the things worth considering as the year draws to a close may also include matters that require attention before those champagne corks pop at midnight on the 31st of December. Today, we’ll look at what an end-of-year financial checklist should include. Starting with your overall situation, we’ll also look at specific financial issues, and touch on tax strategies that may prove useful.

Begin with the big picture

Set aside some time to assess the current year and think very intentionally and proactively about the year to come. This is an activity that may involve any number of family members who are old enough to play a role, perhaps during a scheduled goal-planning weekend. Sometimes the holidays are so busy that this high-level discussion may happen in January. That’s okay, whether you’re talking about big-picture financial decisions such as buying a second home or discussing long-term plans such as retirement, these are the kinds of matters that don’t require immediate action by end of year. Reviewing the insurance and estate planning aspects of your financial plan should be part of this discussion as well. If something has changed in your life since these matters were last addressed during the year you can resolve to deal with them sooner rather than later in the year ahead.

Consider your giving plan

As you move into more specific areas of your checklist, your giving plan is a good place to start since giving should be off the top, in an intentional and purposeful way. Did you give what you intended this year to charity, nonprofits or family members? Will you give the same dollar amounts and to the same places in the coming year, perhaps because you have a percentage goal in mind and your income may differ in the year ahead? Have new charities come to mind to which you’d like to begin giving, or are there others that you may wish to change? Having a firm plan in place can be very helpful when you get that surprise knock on the door asking for a donation. It lets you confidently say, “We’re very strategic about our giving, and we have a plan in place. If you’d like to leave some information, we’ll consider adding you to our giving plan for next year.” This helps take the pressure off. You can also set aside a “miscellaneous” giving fund that allows you make spontaneous giving decisions throughout the year as well.

Do a cash flow analysis

Take a look at your cash flow in the current year. Did income arrive as expected? How about outflow? Did you go over budget in any areas? Again, the word “intentional” should be top of mind as you do this analysis. You want to be intentional with where money is spent. And if expenses deviate from your plans, you should have a clear picture of why that happened and determine whether it’s your budget or your spending that should be adjusted, or both.

Ultimately, you’ll see whether your cash flow leaves any margin at the end of the year to include in your financial planning. This extra cash might be directed to replenish cash reserves you keep on hand for emergencies, or increase what you’ve been saving for the future, including maximizing retirement plan contributions if you haven’t already done so. Finally, you should make your best estimate of what next year’s cash flow will be, and establish savings and retirement contributions for the new year that are in line with your income and goals.

Plan college funding

Another end-of-year item to look at is arrangements for college funding. Have you set aside what you intended in a savings plan, and made all direct payments to colleges required during the year if you have students currently attending? Are you taking advantage of a 529 savings plan—expanded to cover K–12 education in 2017—which can provide a state income tax deduction for contributions in many states? If so, is there room left in your budget to add more to the fund before the end of the year and increase your tax deduction? Note that while 529 plans have no limits on annual amounts that may be contributed to an account, many states do set a maximum total contribution, which recently has ranged from $235,000 to more than $525,000.  And your contributions to a 529 plan are still considered gifts for gift tax purposes.

Think about retirement distributions

If you’ve already turned 72, an essential end-of-year action is to ensure you’ve taken the full amount of any required minimum distribution (RMD) from your tax-deferred retirement accounts to avoid the substantial penalty for failing to do so. RMDs are calculated by applying a life-expectancy factor based on your current age to the values on December 31st of the preceding year in all your eligible accounts (e.g. IRAs and 401(k)s, but not Roth IRAs). Recent changes in the law have raised the age when RMDs begin, and now the first withdrawal must occur by April 1 of the year after the year in which you turn 72.

But be aware that if you do delay that first withdrawal until the year following your 72nd birthday, you’ll be combining it with the RMD for that year as well. Those two RMDs in one year can significantly affect your taxable income, with potential consequences for tax rates as well as other expenses such as the IRMAA (Income-Related Monthly Adjustment Amount) that raises your Medicare premiums based on your income. If you turned 72 this year, taking that first RMD by December 31st of this year may be a wise idea. And if you’re already taking RMDs, ensuring you’ve taken the full amount necessary for this year is of course an important end-of-year checklist item as well.

If you do need to take an RMD this year and you don’t need the money for living expenses, a qualified charitable distribution may be worth considering. This allows you to direct all or part of your RMD to a 501(c)(3) charitable organization. The donated funds count toward the year’s distribution requirement, but because you haven’t taken them for yourself, you’ll pay no income tax on those dollars.  And the charity won’t have to pay the taxes either!

Check your Flexible Spending Account

The total amount you can save in a Flexible Spending Account (FSA) for 2022 is $2,850. Many people contribute on a monthly basis, so by year-end they’ve saved the total. Others wait until the end of the year and make the contribution all at once. If you haven’t already maximized your 2022 contribution, end of year is your last chance. Since FSAs operate on a “use-it-or-lose-it” basis, though, you’ll need to be confident those funds will be spent by March 15, 2023, with any claims filed by March 31. The good news is that $570 of your 2022 balance can be rolled over and added to your 2023 contributions if your plan allows rollovers of unused funds.

Manage capital gains

The capital gains you’ve realized during the preceding year are taxable events. So it can pay to take advantage of offsetting losses you may be able to capture before year-end by selling securities that have declined in value. This is called tax-loss harvesting, and it’s something your financial advisor should do proactively throughout the year when your investments have losses. Up to $3,000 of losses in excess of your capital gains can be deducted from ordinary income each year, and capital losses beyond that can be rolled over from year to year.

If you own mutual funds, you also need to be prepared for capital gains that may pass through to you at the end of the year as a result of securities transactions that were made within the funds throughout the year. Sometimes these can be significant. If you or your financial advisor can proactively research which of your funds are projecting end-of-year capital gains distributions, you can decide to sell funds with outsized gains before the “shareholder date of record” date. This will avoid adding the fund’s distribution to your total capital gains for the year. Be careful, however, not to trigger an even larger capital gain by selling the mutual fund.

Explore additional tax strategies

Focusing further on taxes, end of year is a good time to do a tax projection.  Many CPAs will do this for their clients. With the actual income, deductions and withholding information for the year, you can estimate your tax liability. Then check to see that you’ve paid enough during the year through payroll deductions or estimated payments to cover this. You have until January 17, 2023 to make a fourth-quarter estimated payment if needed.

If you have a traditional IRA, it’s also a good time to consider whether this tax year is favorable for converting some of it to a Roth IRA. You’ll need to pay tax at your marginal rate on the amount you convert, so a year in which earned income and/or investment income is lower can be a good time to do the conversion.

Those with large estates who are using an annual gifting strategy to pass assets to beneficiaries without triggering a gift tax return will want to ensure they’ve maximized those gifts before December 31st. In 2022, every person is allowed to gift up to $16,000 to any other person without triggering the need for a gift tax return.

Finally, while you’re thinking about taxes, look ahead to next year. When you start preparing your taxes for 2022, will you be taking the standard deduction, or will you be itemizing? If itemizing, have you gathered the documentation for items such as out-of-pocket medical expenses? Do you expect your income to increase in 2023, requiring adjustments to withholding or estimated payments? Every year, your goal should be to break even from a tax perspective—you don’t want to have to write a big check in April, but you also don’t want to receive a large tax refund as that means you essentially made an interest-free loan to the government all year!

The end of the year can be a hectic time for everyone. But setting aside some time to take stock of where you stand and where you’re going can be invaluable. Think of it as an integral part of a year-round commitment to sound financial planning.

For assistance with investing, estate planning, taxes, and other aspects of your financial life, or to begin building a financial plan tailored to help you reach your goals, reach out to one of our advisors to discuss how they can help. Contact Merit Financial Advisors today!

Content in this material is for general information only and not intended to provide specific investment or tax advice or recommendations for any individual.