It certainly feels that 2021 is flying by faster than usual! As soon as they went up, our Halloween decorations will be packed away and, incredibly, Christmas will be here. Before it’s too late to think calmly, here’s a short checklist for some year-end financial planning.
Have you checked your beneficiary designations lately? There is a common misunderstanding that deserves highlighting. It’s important to remember that your beneficiary designations for your IRAs and other retirement plan accounts don’t automatically follow the distribution plan you’ve laid out in your trust. These accounts should be viewed as separate ,which means every so often it’s smart to review all your beneficiary designations.
Have you already met your health insurance deductible? If you have, it’s a good time to take care of additional health care needs you’ve been putting off. Once the calendar turns, your out-of-pocket deductible resets back to zero. For that matter, if you’ve been contributing to a “use-it-or-lose-it” flexible spending account through your employer, it’s also time to set up that eye exam or dental work. Prepare to be put on their cancellation list, of course!
Have you reviewed your charitable giving for 2021? Under the current tax law, most people don’t itemize their deductions anymore. Instead, the super-sized “standard” deduction is used by about 90% of taxpayers. Due to this, in a typical year most people don’t get any tax break for their charitable giving. But, for the past two years now Congress has added a special opportunity to get a charitable donation deduction, even if you don’t itemize on your tax return. For 2021, single filers can get a tax deduction for up to $300 in cash donations to charities and couples can deduct up to $600.
Beyond this year’s special above-the-line deduction, if you’ve reached the age where you have to take required minimum distributions from your IRA, remember that you can also meet your requirement by donating some of it directly to charities. These charitable IRA distributions will not count as taxable income. Brokerage firms can issue you a dedicated IRA checkbook to make this process much easier.
Do you know about the special 0% tax bracket? Yes, amazingly, this actually exists! However, it can be a little bit difficult to understand. If your taxable income happens to fall inside the 12% tax bracket, your dividends and realized long-term capital gains are not subject to federal taxes.
To help visualize how this works, picture a stack of bricks that represents all of your taxable income. Your dividend income and capital gains always sit on the very top of this stack. As long as your full stack of taxable income sits under about $40,000 for single filers and about $80,000 for married filers, those top bricks won’t be taxed at all. If you’ve still got some room, or can create more room, inside the 12% tax bracket, look to harvest some of your long-term capital gains at a zero federal tax rate. That’s a deal that’s too good to pass up.