10 Things to Do Before December 31st (2021 edition)

Beth Misak |

By Paul Hynes, CFP®
October 2021

If you want to save money on taxes and maximize potential financial opportunities, you must act before December 31st. With the holidays fast approaching, here are ten things to consider before the ball drops in Times Square.

Note: While tax changes have been proposed, nothing has been passed as of this writing. So, we are still using current tax rules. If and when things change, we’ll revise our guidance accordingly.

  1. Contribute the max to your 401(k). Make sure you’ve contributed the most you can afford, up to the statutory limit, currently $19,500, to your 401(k) at work. Some plans allow you to defer any amount of income up to 100%. That means you can make up a lot of ground in a short period of time. (Those over 50 years of age can contribute an additional $6,500, for a total of $26,000).
  2. Harvest capital losses. Taking capital losses this year can help lower your tax bill next year, and possibly for several years to come. Losses can offset gains, dollar for dollar. And, up to $3,000 of losses can offset your ordinary income each year. Two cautions: (1) Be aware of transaction costs, and weigh the costs versus the potential tax savings; and (2) Be aware of the wash-sale rules and make sure you don’t run afoul of these rules.
  3. Withhold enough tax. Check to see that your year-to-date income tax withholding is on track to have enough withheld to avoid tax penalties. This applies to both Federal and State taxes.
  4. Take your required distribution. If you’re over age 70-1/2 (or age 72, if applicable), make sure you’ve taken your required minimum distribution, or RMD, before year-end. The penalty for failing to take the full RMD amount is 50% of the shortfall—in addition to regular taxes. So, it’s really important to get this right.
  5. Distribute directly to charity from your IRA. Remember that you can contribute to charity directly from your IRA and the contribution amount will qualify as RMD; it won’t be included in income. That can be both good for your finances and for your soul.
  6. Donate to charity. Speaking of charity, any contributions you make to charity before year-end can be deductible against up to 50% (100% for 2021, see “New for 2021” below) of your income. You can make gifts with cash or property, including appreciated investments. Giving investments that have gained in value can be a very efficient way to benefit a charity and avoid capital gains taxes. Also, clean out your home of unwanted items of clothing, furniture, and the like and donate them.
    New for 2021: If you donate cash to a charity, you will get a tax deduction of up to $300 if you’re a single filer, or $600 if you file jointly, even if you don’t itemize your deductions. And, individual donors who itemize can deduct up to 100% of their income this year.
  7. Bunch medical expenses. Health care insurance deductibles may be a sore subject for some. In spite of your feelings about your deductible, you should know where you stand. If you’ve already hit the deductible amount, you may want to bunch medical expenses into this year. If not, it might make sense to bunch them together next year.
  8. Use up your FSA. If you have a flexible spending account, or FSA, make sure you spend the money in the account before year-end. Usually, only a limited amount, such as $500, can carry forward to the first part of next year.
  9. Make a gift. You can make a gift of up to $15,000 to any person without filing a gift-tax return, $30,000 if the gift is from a couple. And, it is excluded from any gift tax or other ramifications to your estate. This exclusion expires at year-end and will renew again next year.
  10. Give to a 529 plan. You may want to make a gift to a child or grandchild by making a contribution to a 529 College Savings Plan. In this case, you can elect to make up to five years’ worth of gifts in one year. That’s a total of $75,000 for an individual or $150,000 for a couple. There are strings attached, however, so you must be aware of them.

This list may be daunting. And, I haven’t included every detail. So, the most important thing to do is schedule a review session with your tax advisor before year-end, when there’s still time to do something about your finances for this year. After the ball drops, it’s too late. Remember, you can always talk to us as well. We’re here to help.