As the end of the year rolls around, there are lots of little financial tasks that are well worth taking care of before the calendar (finally) closes on 2020. Here are six valuable and simple financial steps you can take care of before the new year.
Make charitable contributions
Charitable contributions are always a good idea, whether small donations or big ones, but when you donate can have a real impact on your taxes. Donations made within a particular calendar year can be deducted from your income taxes when you file them the following spring.
For most Americans, this won’t make a big difference on their taxes, as you have to be filing long-form and itemizing your deductions to get a real benefit. However, if you have a large home mortgage or lots of other deductions, you likely are itemizing them, and thus any additional charitable donation results in another deduction on your taxes.
If you’re in the 32% tax bracket, for example, and you’re itemizing your taxes, a $100 charitable gift results in a $32 reduction in your tax bill. That’s a nice extra perk beyond the wonderful feeling of giving!
Make Roth IRA and other retirement contributions
Most common retirement accounts, including the Roth IRA and your workplace 401(k) or 403(b), have an annual limit on contributions that resets at the end of the calendar year. Furthermore, once the year is over, you can’t ever go back and make contributions in an earlier year’s window. The $6,000 you’re allowed to contribute to a Roth IRA in 2020? That opportunity ends forever when you file your taxes, giving you a fresh window for 2021.
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Furthermore, there are tax implications right now for some contributions you make. If you bump up your contributions to your traditional 401(k), it will reduce the income taxes you owe, for example. Pre-tax contributions like these mean a smaller tax bill in the spring.
Thus, before the end of the year (or before you file your taxes next year, depending on the specific type of account), make your retirement contributions for the year.
Make sure you spend all the money in your FSA
Your FSA — or flex spending account — is a perk offered by many employers with their health care plans. Many employers make contributions to FSA accounts for their employees. Money in your FSA can be used to reimburse you for medical expenses by submitting a claim with proof of that expense. If you’re unsure if you have an FSA account or what the specific rules are, talk to your employer.
The big catch is that money in an FSA must be used within the plan year, which for many employers ends on December 31. If that money is unused, it goes away.
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So, if you have an FSA at work and your employer contributes to it, you should use that money as soon as possible. This is a great opportunity to get that checkup you’ve been putting off, knowing that you’ll be able to easily afford treatment with the money in that account. Just get it done before the end of the plan year (which is often the end of the calendar year).
Make contributions to your HSA
To make things ever so confusing, there’s also a separate type of account for similar purposes called an HSA, or health savings account. These are often a part of health care plans with a high deductible, giving people a convenient way to spread out their out-of-pocket medical expenses.
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In short, money you put into an HSA is tax-deductible this year, which means that if you’ve got plenty of deductions, contributions will reduce your income tax bill. You can contribute while you have a high deductible health care plan.
Put reasonable limits on holiday spending
One powerful thing you can do as the year winds up is to put some strong limits on your holiday spending. There are several approaches you can take to this challenge.
First, ask yourself whether an expense is even worthwhile? Do you need to send a gift to that person you rarely see, or will a letter or a phone call suffice? Many people prefer just to have meaningful contact rather than a gift.
Second, if you are buying a gift, is it something thoughtful, or are you just spending money to show you care? A smaller more thoughtful gift means more than an expensive and ill-considered one. Put careful thought into those who remain on your gift list. Set a tighter budget, but also invest time into really thinking about the person and what they’d like by doing real homework on them.
Third, consider whether your celebration itself makes sense. Many people will be celebrating a “virtual” holiday season due to COVID-19 in 2020, meaning far less money spent on travel, providing a financial upside to a disrupted holiday season. Even if you are gathering in person, does it make sense to spend as much on food and beverages and other treats as in the past? Do they really provide value?
Make financial goals for 2021
Many people use the end of the year as an opportunity to set goals for themselves and reassess the state of their lives. With 2020 exposing many harsh truths about how we live our lives, there is perhaps no better time to take a moment to reflect and set really meaningful goals for the coming year.
A good strategy for this is to develop SMART goals for 2021. A SMART goal is one that is specific, measurable, achievable, realistic and time-limited. For example, saying “I want to save $100 a month for the whole year” is a SMART goal. It’s specific (states exactly what to do), measurable (should hit $1,200 in 12 months), achievable (relatively, depending on your finances), realistic (depending on your finances) and time-limited (every month for 12 months)
Setting goals that follow the SMART strategy are much easier to follow through on, but they require a lot of forethought. Start giving your goals some careful thought now so you can set good goals for 2021.
Too long, didn’t read?
As the end of the year approaches, there are many things you can do to set yourself up for success in 2021 and beyond. Make charitable contributions, particularly if they help with your taxes. Consider adding to your Health Savings Account (HSA) and to your retirement accounts, particularly your Roth IRA. Spend any money remaining in your Flexible Spending Account (FSA). Make smart holiday spending plans. Consider strong, sensible goals for 2021. Taking those steps now, before the end of the year rolls around, will set you up for success in the future.
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