There’s about a month left in the calendar year. While many are using this time to prepare for holiday festivities and enjoy time off with loved ones, there are key financial areas you can focus on now to get ahead for 2023.
Here are some of the best ways to start financially preparing for 2023, even during the holiday season.
Prepare Now for a Positive Tax Return Next Year
Paul LaPiana, CFP and head of product with MassMutual, recommends grabbing this year’s income tax return and making a list of the items needed to complete it. Start a folder to drop all necessary items into, like statements and receipts, to avoid scrambling come tax time.
You should determine if there are any steps to take now to ensure a more positive return next year. Here are a few questions to answer to provide a long-term gain for you and others:
- Can you contribute a bit more to qualified retirement and college savings plans to reduce your tax consequences next year?
- What if you withheld a bit more or less?
- What if you requested and kept all of your receipts for cash and material donations to apply to next year’s tax return?
Make Sure Your Withholding and Estimated Tax Payments Are Adequate
The last couple months of the year are a good time to confirm if your withholding and estimated tax payments are adequate.
“Over the past several years, the federal underpayment rate was low enough that some taxpayers became less concerned with meeting estimated payment requirements,” said Al Kingan, ChFC, estate and business planning with MassMutual. “As of October 1st, the underpayment rate is now 6%.”
If you’ve been making quarterly estimated tax payments throughout the year, use this time to check in with your CPA to see if you need to make an estimated tax payment in January.
“Generally speaking, capital gains for investors with taxable accounts are likely to be lower this year, which means you may not have to make an additional payment in January. This could mean keeping that money in your pocket,” said Stephanie Richman, CFP and regional director of Northern California/East Bay at EP Wealth Advisors.
Determine if You Are on Track To Max Out Your 401(k)
Have you been able to max out your 401(k) this year? If not, Bruce Tannahill — CPA and director of estate and business planning with MassMutual — said to ask if you can afford to increase your contributions. This is especially important to ask if you aren’t getting the fullest employer match possible.
What about maxing out IRA contributions? Richman said there’s still some time for this: you have until Tax Day in April 2023 to make IRA/Roth IRA contributions for 2022. Contributions can also be made for the 2023 tax year starting in January.
Prepare To Itemize Deductions in 2022 if Applicable
Check to see if this applies to you. Tannahill said the standard deduction is now $12,950 for single individuals and $25,900 on a joint return, so many people no longer qualify to itemize deductions.
If you won’t be able to itemize deductions, Tannahill said consider delaying charitable contributions until 2023 when you may be able to itemize deductions. You may also consider accelerating charitable contributions you’d normally make in 2023 to 2022 and donate to a donor advised fund in 2022 for distribution to charities in 2023.
Check Your Emergency Fund Status
Whether you’re single, part of a household or retired, use the last few months of 2022 to determine the status of your emergency fund. Brian Mawhinney, CFP and head of financial planning with MassMutual, said accumulators with a single income stream household, or a household with variable income, are recommended six months of expenses in emergency reserves. Those with dual income households will need three months worth.
Retirees need a few years of emergency funds to fall back on. Mawhinney recommends anywhere from one to three years of expenses saved in financial instruments that allow immediate access to cash. Retirees may utilize the three-tiered approach, sometimes referred to as a bucket retirement strategy. The initial tier is liquid in a checking and savings account, the middle tier is typically a money market type investment and the third tier is laddered CDs or short duration bonds.
“By putting 1/3 of cash into each tier, you can protect yourself from market fluctuations, and with laddering CDs and short duration bonds, you can provide the flexibility needed to seek new opportunities to increase yield as the instruments mature,” said Mawhinney.
Give Yourself the GIFT of a Financial New Start
This is an acronym used by Jacqui Kearns, chief wellbeing officer at Affinity Federal Credit Union. GIFT breaks down into four words: Gain, Investigate, Find and Treat.
Now is the time to gain an understanding for your spending and map out a plan to pay down your debt. Kearns said most credit card and checking and/or savings accounts will have an online spend profile for key categories to provide your personal spending habits and profile.
Take a moment to better know where your money has gone over the last year. Kearns said this will help you gain important insight to where you can either budget better, pull back, or find alternatives for those in high spend categories.
Which other financial partners can offer you better savings rates or lower interest rates on your credit cards and auto loans?
“Investing this time before the end of the year will help you find a financial services partner with your interest, not their interest in mind,” said Kearns.
This is the time to find a financial partner. Kearns said having a financial partner can help you establish a budget that pays down any debt while finding ways to save more money faster.
Remember: this acronym spells out GIFT! “Treat yourself to turning the page on your next financial chapter, where the little time invested to gain an understanding for your spending habits and finding a true financial partner can set you on a path to thriving financial wellbeing,” said Kearns.
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