James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
From the hope that came with reopening to the disappointment of another COVID-19 resurgence, 2021 has panned out to be another roller-coaster year. But at least in terms of your finances, there are things you can do during this last month to help position yourself to go out on an upswing – and set yourself up for a better start to 2022 as well. New rules related to the pandemic, coupled with tax and retirement changes that carried over from last year, means there’s a lot to consider.
This checklist highlights some key points to help guide you as you get started.
1) Boost Your Retirement Contributions
If you have an employer-sponsored retirement account that offers an employer match, make sure you’re maximizing contributions to take full advantage of that match. If you have a traditional IRA you should also check to make sure you’re maximizing your contributions – recent changes may mean you can contribute more than before. The SECURE Act repealed the maximum age for contributions, so individuals ages 70 and a half and older who earned income in 2021 can contribute to a traditional IRA. The Modified Adjusted Gross Income (MAGI) limits for contributions to traditional and Roth IRAs increased in 2021, so be sure to review MAGI eligibility thresholds.
2) Use FSA Dollars and Make HSA Contributions
In 2020, the IRS relaxed certain “use-or-lose” restrictions for Flexible Spending Accounts (FSAs) that remain in effect this year, meaning that employers can extend the grace period for unused FSAs up to 12 months in 2021; and if you have a dependent care FSA, you can save as much as $10,500 this year. If you have a high deductible health plan (HDHP), think about maximizing your Health Savings Account (HSA) contributions. In 2021, the maximum contribution is $3,600 for an individual and $7,200 for a family. (If you’re age 50 or older you can contribute an additional $1,000.)
3) Manage Your Income Tax and Capital Gains Tax Brackets
There are various tax brackets for regular income as well as capital gains. If you’re on the threshold of a tax bracket, you may be able to put yourself in the lower one by deferring some income to 2022. You can see which tax bracket you fall into and the detailed thresholds for these rates in the “Key 2021 Numbers” document on our website.
4) Pay Attention to American Rescue Plan (ARP) Details
This statute made several changes that could affect your taxes this year. If you had federal or private student loans that were canceled or forgiven, you won’t owe taxes on those this year, or through 2025. If you were unemployed this year, take note – in 2020, $10,500 of unemployment benefits were exempt from income tax. This exemption does not apply this year, so if you received benefits but didn’t have taxes withheld, it’s possible you may owe at tax time.
If you have children, there are two ARP changes you should know about.
First, in July, the IRS began issuing 50 percent of the child tax credit in six monthly advanced payments. Payments are based on 2020 income, so be sure to review your eligibility for the credit and note that you may need to reconcile the advanced payments if your income increased in 2021.
Second, the Child and Dependent Care Credit is fully refundable in 2021. If your family earns less than $125,000 annually, you may claim a 50 percent refundable credit on care expenses of $8,000 for one child or dependent or expenses of $16,000 for two or more children or dependents.
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5) Rebalance Your Portfolio
Reviewing your capital gains and losses may reveal tax planning opportunities, such as harvesting losses to offset capital gains.
6) Prepare for Retirement Plan RMDs
Under the SECURE Act, if you reached age 70 and a half after January 1, 2020, you can wait until you turn 72 to start taking RMDs. (RMDs are required in 2021.) If you took coronavirus-related distributions (CRDs) from your retirement plan, review the repayment option you chose in 2020. Remember, the choice not to repay all of a CRD in 2020 is irrevocable. If you took a 401(k) loan after March 27, 2020, you’ll also need to establish a repayment plan and confirm the amount of accrued interest.
7) Adjust Withholding and Prepare for Student Loan Repayment
If you think you may be subject to an estimated tax penalty, consider asking your employers (via Form W-4) to adjust your withholding to cover shortfalls. The IRS tax withholding calculator can help you with your estimates. In addition, student loan payments, which the CARES Act paused in March 2020, are scheduled to resume in February 2022. If you reduced other debt during this period, you’ll need to adjust your monthly cash flow to include upcoming student loan payments.
8) Assess Your Estate Plans
Review and update your estate plan to make sure it’s still in line with your goals and accounts for any change in circumstances. Depending on your net worth, establishing a defective grantor trust, spousal lifetime access trust, or irrevocable life insurance trust may be an effective strategy to reduce your estate tax exposure. In addition, take the time to update your beneficiary designations and review trustee appointments, power of attorney provisions, and health care directives.
Rely on Us as a Resource
It’s not too early to get a jump on planning—and even though your situation is unique to you, this high-level checklist can be a great starting point. Please feel free to contact us to talk through the issues and deadlines that affect you. We can help to ensure you’re prepared for the coming year, and use our Plan Well, Invest Well, Live Well process to create a plan to help you reach the financial goals you have for yourself and your loved ones in the years to come as well.
Presented by Principal/Managing Partner Laurence Hale, AAMS, CRPS®. Prepared by an independent third party for Commonwealth Financial Network®, copyright 2021. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com (http://www.whzwealth.com).