The year-end holidays approach, and bring lots of things to do. Yet with holiday cheer there are financial plans to make, too.
Consider these financial opportunities before 2022 arrives.
As we count our many blessings and share time with our loved ones, we can express our thanks through giving to others. Donate to your favorite charity before year-end.
Generally speaking, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of the taxpayer’s adjusted gross income. But did you know that the IRS has temporarily suspended limits on charitable contributions?
Sure it might change, but as of now, qualified contributions are not subject to this limitation and individuals may deduct qualified contributions of up to 100% of their adjusted gross income.
To qualify, the contribution must be a cash contribution and made to a qualifying organization.
Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits. You can gift assets or cash to your child, any relative or even a friend, and take advantage of the annual gift tax exclusion. Any individual can gift up to $15,000 this year to as many other individuals as he or she desires a couple may jointly gift up to $30,000. Whether you choose to gift singly or jointly, you’ve probably got a long way to go before using up the current $11.7 ($23.4 million for couples) lifetime exemption.
Grandparents, aunts, uncles and parents too can fund 529 college saving plans this way, but it is worth noting that December 31st is the 529 funding deadline.
Most employers offer a 401(k) or 403(b) plan, and you have until December 31st to boost your contribution. This year, the contribution limit on both 401(k) and 403(b) plans is $19,500 for those under 50 (it’s going up by $1,000 next year) and $26,000 for those 50 and older. This year, the traditional and Roth individual retirement account contribution limits are $6,000 for those under 50 and $7,000 for those 50 and older.
But be careful because high earners face contribution ceilings based on their adjusted gross income level.
Remember IRA cash-outs. Once you reach age 72 you are required to take annual Required Minimum Distributions (RMDs) from your retirement accounts.
Your first RMD must be taken by April 1st of the year after you turn 72. Subsequent RMDs must be taken by December 31st of each year. If you don't take your RMD, you'll have to pay a penalty of 50% of the RMD amount.
Did you inherit an IRA? If you have and you weren’t married to the person who started that IRA, you must take the first RMD from that IRA by December 31st of the year after the death of that original IRA owner. You have to do it whether the account is a traditional or a Roth IRA.
Consider dividing it into multiple inherited IRAs, thus extending the payout schedule for younger inheritors of those assets. Any co-beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.
If your spouse died, then, you should file Form 706 no later than nine months after his or her passing. This notifies the IRS that some or all of a decedent’s estate tax exemption is carried over to the surviving spouse.
Business owners’ retirement plans. If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one- person 401(k), the so-called Solo (k). You don’t have to be exclusively self-employed to set one of these up – you can work full-time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.
Contributions to SEPs and Solo (k) s are tax- deductible. December 31st is the deadline to set one up, and if you meet that deadline, you can make your contributions as late as April 15th next year (or October 15th with a federal extension).
You can contribute up to $58,000 to a SEP and this rises to $61,000 next year.
If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo (k) contributions can’t be greater than the $19,500/$26,000 limits. But even so, you can still pour up to 25% of your net self-employment income into a Solo (k).
As you can see, there are a lot of rules, deadlines and contribution limits that change from year to year. Further, many of these ideas might be helpful to your situation – but they might be inappropriate too.
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