Good or bad, right or wrong, retirees have many financial decisions to make before year-end. Many of these decisions can result in tax savings, improved yields, fewer hassles, and fulfilled planning goals. This end-of-year timing, unfortunately, clashes with the holidays and it’s easy to procrastinate. However, if you put things off, you may end up starting the new year with regrets.
To help make the process less burdensome, below is a checklist of typical decisions that retirees face at the end of the year. Take a look and if an issue applies to your situation, use it as a means to start the process before the end of the month surprises you. A few minutes of your attention now may help you avoid a year of disappointments.
1. Healthcare
By the time you read this, the 2022 open enrollment period for Medicare has come and gone. But other decisions may yet apply. For example, if you still have your health insurance through an employer, have you fully utilized your FSA account? Do you have expenses you can pay before year-end to bunch your medical deductions, making them deductible? If you’re too young to be on Medicare, is there still time to purchase ACA-compliant health insurance? January 1 is a common beginning date for a myriad of healthcare plans, features, and benefits. Use your remaining time this year to make sure you’re set up to take advantage of next year’s opportunities.
2. Gifts
You have until year-end to take advantage of the $16,000 annual gift tax exclusion. This per donee/per year exclusion can help you avoid future transfer taxes. You can even double the amount of your gift by using the gift-splitting technique with your spouse. Keep an eye out for special opportunities like 529 education plans where you can use up to five years’ worth of annual exclusion gifts in a single year. If you’re paying someone’s tuition or doctor’s bills, you can make unlimited gifts without worrying about gift tax.
3. Donations
Many retirees are motivated to do well tax-wise by doing good for the community. Generally, you can only deduct your donations if you itemize your taxes, and most retirees will use the standard deduction. For some, however, there is the possibility of deducting charitable donations by bunching donations into targeted tax years. If the charitable tax deduction is important to you, consider making both this year’s and next year’s planned donations all in 2022.
With this approach, you will itemize your taxes this year and use the standard deduction next year. Further, if you want a 2022 tax deduction, but are not ready to decide which charity should benefit, consider utilizing a donor-advised fund (DAF). With this strategy, you can write the check to the DAF this year, but decide next year which charities should receive how much, and when.
4. Investments
It’s been a tough year for investments. Before the end of 2022, consider selling your investments that are in a loss position. You can use these losses to offset taxes on your investment gains. You can also carry losses forward to reduce investment gains up to $3,000 per year indefinitely. Capturing these losses makes sense even if you think they’re temporary. You can repurchase the same investment after 30 days and avoid the so-called wash sale rule.
5. Required Minimum Distributions
Once turning age 72, retirees must be hyper-alert to the RMD issue. If you fail to take your required minimum distribution by the end of the year, you face a 50 percent surtax. Be sure to use the updated IRS tables for calculating your RMD. Also, if you turn 72 in 2022, be sure to understand your options. While you can wait until April 1 of next year to take your first drawdown, that also means you’ll have to take two RMDs in 2023. This can cause both liquidity and tax timing hassles.
6. Tax Savings
Even though retirees are usually no longer receiving wages, there are still many year-end tax decisions to consider. We’ve mentioned tax deduction issues such as healthcare, charitable donations, and investment losses, but there are also reasons to intentionally bring income into this year’s taxes. Two primary reasons for retirees to accelerate the recognition of income are bracket management and Roth IRA conversions. If you’re planning to tap your tax-advantaged IRA accounts for income in retirement, it may make sense to draw down enough of that income in 2022 to edge up close to the top of your marginal income tax bracket.
With this kind of planning, you are spreading out the taxes on your IRAs without causing them to be subjected to a higher marginal tax rate in any one year. This can also be done with a Roth IRA conversion. If you want the tax advantages of a Roth conversion, work with your tax advisor to convert just enough in 2022 to avoid creeping into a higher tax bracket. A word of caution, however, is that retirees face some irregular tax threats that affect planning. For middle-class retirees, the so-called tax torpedo can cause their social security benefits to go from being tax-free to taxable. In particular, be alert to whether your IRA drawdowns will make your social security benefits taxable.
For more affluent taxpayers, there is a similar threat with the income-related monthly adjustment amount (“IRMAA”) penalty for Medicare recipients. If you have too much income, your Part B and D premiums can increase significantly. Factoring in this penalty is complicated because Medicare typically looks back two years to determine your income. These tax planning issues may be significant and complex enough that it’s worth getting professional help.
7. Appointment
Some of these year-end planning decisions may require professional help. The challenge is that you may not be able to get this assistance in time. Advisors have families and may want to take off time at year-end as well. Go through your year-end checklist now. If you decide you need professional help, then make an appointment as soon as possible.
For more information on financial planning for retirement, check out these articles:
