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Year-End Money Moves

It’s that time of the year when thoughts turn not just to the football season and holiday plans but to year-end financial moves. As much as you might want to focus your attention on other matters, the personal finance calendar demands your attention right now.

Unsurprisingly, we need to start with taxes.

December 31 is the cut-off date to complete several year-end money moves that will affect your 2022 tax bill. (I don’t need to tell you that you actually have until April 15, 2022, to complete your annual contribution to your IRA, do I?)

Tax Moves

You may be surprised to learn that when it comes to your income, sometimes less is more. An often-overlooked part of tax planning is considering whether you should actively lower the Adjusted Gross Income (AGI) shown on your federal tax form to take advantage of income-limited tax benefits.

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The Child Tax Credit, which you may already be receiving as an advance, is a perfect example. If you missed out on the most recent Recovery Rebate Credit (aka “stimmie”) because your income exceeded $80,000 ($160,000 if married) in 2020, you’ll have another chance to claim it when you complete your tax return next year.

Parents of college-age children should carefully consider the American Opportunity Credit. If you’re a student yourself, the Lifetime Learning Credit may be available to you. Both of these credits phase out above a certain income threshold.

Are you paying back student loans? With an AGI below $70,000 ($140,000 if married), you can deduct up to $2500 of student loan interest you paid during the year, even if you do not itemize deductions when preparing your tax return.

Other income-limited tax benefits include the healthcare premium tax credit and the Saver’s Credit and Earned Income Tax Credit for low and middle-income households.

So how can you lower your AGI (without lowering your salary, that is)?

–        If you participate in a Health Savings Account (HSA), you can top up your account with a lump sum contribution if your regular contributions will leave you below the maximum allowable.

–        Reconsider your Roth vs. traditional IRA contribution strategy. In your quest to avoid taxes in your retirement future, have you overlooked the possibility of meaningful tax benefits in the present? Contributions to a traditional IRA will lower your AGI. (Pro tip: You can “recharacterize” your 2021 IRA contributions, switching between Roth and traditional, right up to April 15th.)

–        Are there investments in your portfolio that, based on your goals, no longer belong there? If they’ll generate a capital loss when sold, you can apply up to $3000 of this loss against your income, resulting in a lower AGI.

Them Goals 

Next, review the specific 2021 money goals you set back in January. Are you on track to meet your benchmarks? These may be goals around increasing savings or decreasing debt. Which goals can you power-fund before the year ends?

Your ability to hit those outstanding 2021 money milestones will be influenced by the actions you take between now and December 31. Just a couple months away from peak holiday season is the perfect time to forecast your anticipated holiday spending and make a plan to meet the moment.

Naturally, I want you to set a holiday spending target you can finance with cash and stick to it. But if you see that’s not going to happen, then do this: 

Estimate your January credit card balance, fully accounting for your anticipated holiday travel-and-gifting splurge. Then, use one of the many online calculators to see exactly how long it will take you to pay it off. If you don’t like what you see, now’s the time to change that dynamic.

Your 2021 financial goals may also have included achieving less specific monetary milestones…a new job or professional certification, perhaps a new home, or preparing an estate plan.

I don’t want to let you off the hook entirely, but this also may be the time to review whether the goals you set out early in the year are still realistic to achieve in the time you have left. 

Has anything changed in the environment, outside of your control, that’s standing in the way? What goals will you carry over to 2022, and which ones no longer serve you?

Planning Moves 

Finally, for your financial life, the end of the year is draft season. It is time to start selecting your 2022 financial team: tax preparer, accountant, financial coach, investment advisor, attorney. What are your 2022 money goals, and who do you need to help achieve them?

Use the remainder of the year to scout out talent ahead of the next season (next year).

What positions do you need to fill? Do you need to make any trades? For many, a fee-only Certified Financial Planner (CFP) is a vital member of the team. You can start your search for a CFP here.

Does your team member even need to be a human? For investment advice, robo-advisors proliferate, providing low-cost investment recommendations based on a consideration of both your objective capacity to take a risk and your emotional tolerance to withstand the risk.

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But also consider “special teams” players that you may not have thought of before. For example, financial therapy is an emerging area.

Financial therapists work with clients to deeply explore their emotions around money that drive their spending, saving, and investing behaviors. You can find a certified financial therapist through the Financial Therapy Association.

And don’t limit yourself to “just” money matters. A career coach could be the player you need to reignite your professional ambitions or help you explore options for entrepreneurship.

Manage your moves

The end of the year is near. In your headlong rush to get to New Years Day, it would be pretty easy to skip out on looking back at your 2021 financial picture. Resist the temptation: the money moves you make now can set you up for success in 2022.

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