Saying Goodbye to 2021 and Getting Ready for 2022
This year is quickly coming to a close. We saw the benefits of vaccines and treatments for COVID-19 in 2021 help us get back to some level of normalcy. Although 2021 has brought sorrow and strife to families throughout the country both emotionally and financially, 2021 also gave us hope for better times ahead in 2022. It is during this time of the year as we approach the holiday season, that we often reflect on the blessings bestowed upon us, and cherish our family and friends while remembering the loved ones we have lost.
As I reflect on the blessings bestowed upon me and my family and friends this year, I am reminded how grateful I am for the families I serve, and the wonderful clients and colleagues I have been fortunate enough to work with over the years. As 2021 is coming to a close, I want to take this opportunity to reflect on 2021 and look forward to 2022 with a focus on what we can do to start getting ready for a new year.
While there is reason to be optimistic that 2022 will bring continued progress in achieving a pre-pandemic level of normalcy, it is unlikely that this return to normalcy will occur on January 1, 2022. In the meantime, life marches on. We are just as busy as ever with supervising kids attending school and other activities (in-person or virtually), pursuing new employment opportunities or adapting to new work environments, and adjusting savings and investment goals. With so much going on in your life, it can be easy to forget the details that can help you prepare for whatever 2022 may bring. That is why we are here: to remind you of those things that can make your life easier when it comes to your estate, financial, and tax planning. Here are a few important things to consider as the year comes to a close.
Maximize Contributions to Retirement Accounts
This year and last year brought plenty of employment disruptions for many of us. These disruptions may have resulted in a job change and the establishment of a new 401k account with your employer. Or they may have caused you to reduce or even suspend making regular paycheck contributions to your retirement account given the uncertainty of the job market as the pandemic escalated. As a result, you may not have maximized your annual contributions to your retirement accounts in 2021. Depending on your current employment status, perhaps you have forgotten to restart your contributions and are at risk of missing out on the opportunity to maximize your annual contribution limits. Although the IRS has routinely allowed for contributions to be made even after the first of the year for the preceding year, it is typically good practice to make such contributions before the end of the year if possible.
Tax Return Preparation
December is the perfect time to begin pulling together your tax records in preparation for filing your 2021 tax returns. The sooner you can begin to get a sense of what your tax bill will be for 2021, the sooner you can prepare to write that check to the IRS or carefully plan how you will use any tax refund if you are entitled to one. In either case, preparing now for tax season can be an easy way to reduce stress over the holidays by knowing that you are ready to begin working on your returns just as soon as January 1 comes around.
You can begin gathering the following information and documentation in preparation for filing your tax returns:
Social Security numbers and birthdates for everyone to be listed on your return
W-2 forms, any 1099 forms, bank or financial institution tax statements, miscellaneous income records (e.g., gambling or lottery winnings)
Property tax payment records
Receipts for medical expenses and health insurance coverage records
Business expense records
Home office expenses
A frequently forgotten tax benefit that exists for all US citizens is the ability to gift up to $15,000 per person (in 2021) without incurring any gift tax liability and without the need to file a gift tax return. This annual gift tax exclusion amount is noncumulative, so it is a use-it-or-lose-it tax benefit. Because the pandemic has caused financial hardship for many people, utilizing the annual gift tax exemption may be a great way for you to help family and friends without incurring tax liability.
If you have significant wealth, you should seriously consider leveraging this annual gift tax exclusion in 2021 as a part of an ongoing strategy for reducing your estate’s size and thereby avoiding potential future estate taxes. Although writing a check for $15,000 to each child or grandchild annually is one way to use this tax benefit, it may not be the best way. Forming a trust can add significant benefit and protection to this kind of gifting strategy.
For example, forming an irrevocable life insurance trust continues to be a highly effective way to leverage the annual gift tax exclusion by using the annual cash gifts to purchase life insurance on you, your spouse, or both of you. At your death, the life insurance benefits pass income tax-free to the trust and can then be managed and used on behalf of your trust beneficiaries in a much more protective and strategic manner.
If you have questions about how to best leverage this annual gift tax exclusion, we would welcome a phone call to visit with you about it and help you understand the available options.
It Might Be Time to Review Your Estate Planning
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in late December 2019, had a major impact on estate planning for those with significant savings in tax-deferred retirement plans. No longer can required minimum distributions from an inherited IRA be stretched out over the lifetime of the person inheriting the IRA. Unless a beneficiary is a spouse or otherwise qualifies as an Eligible Designated Beneficiary, the retirement account must now be paid out within ten years of the plan owner’s death. Many people are still very unaware of these changes and how they could impact their estate planning.
With all of the changes that 2021 has brought, it is more important than ever to review your estate planning documents. If it has been a few years, you will want to make sure that your plan still reflects your wishes. Give us a call to schedule a review of your plan if you or your loved ones have experienced any of the following life changes:
Marriage or divorce
Birth or death in the family
Retirement or loss of employment
Acquiring new accounts or property
If you currently have a trust-based estate plan, carefully reviewing your financial accounts before the end of the year to determine how your accounts are titled and how the beneficiary designations have been made can ensure that you catch critical mistakes and identify accounts unintentionally left out of your living trust.
Taking the steps described above can go a long way toward preparing you for the upcoming year. When you are prepared, there is not much room left for uncertainty and fear. Instead, you can feel confident heading into the holiday season that you will be ready for whatever 2022 has in store for you.
I wish you and your family a Happy Holiday season and a New Year filled with Good Health, Peace, Joy and Prosperity.
Adam Demetri, Esq.