Say, “What are you doing for the holidays?” and most people think you are asking about parties—sharing meals with friends and relatives and ringing in the New Year. With as rough a year as 2022 has been with adjusting to new business practices, market volatility, and soaring inflation, it's understandable to plan for some fun. However, before we are doing any party planning, we must spend time doing real planning that matters—i.e., putting our financial health in order. So let's go over a checklist to help you do just that.
To start, think of it in two parts: First, do an “annual review” of your estate planning-related matters. Then, once you have that in hand, it's time to take action. Also, you'll see that some items are short, some will take a while to complete. But all of them are worth the investment in time.
THE ANNUAL REVIEW
REVIEW… YOUR ANNUAL INCOME—GAINS OR LOSSES?
Many people wait until they are preparing their taxes to have mastered their gains and losses for the year. And you may not be receiving end-of-year statements for weeks into the New Year, but to the best of your ability, try to identify significant capital gains and losses now.
Depending on your results, you may decide to make larger contributions to retirement accounts, make gifts to family members, or make other financial shifts that can reduce your tax liability.
REVIEW… YOUR WILL AND TRUST
You should regularly review your existing will and related trust documents because conditions change. You may have acquired or disposed of assets, or perhaps a new key tax provision will impact your existing plan. And while a regular review of your plan is useful at any time, doing it before the end of the year is a smart use of your time—because then you can make any necessary adjustments before a new tax year and potentially reap some immediate benefits.
When reviewing your will and trust documents, ask questions such as the following:
- Are there any new beneficiaries (e.g., new spouses, children, grandchildren) who need to be added?
- Are there any beneficiaries who should be removed from inheritance (e.g., family members who divorced or died in the past year)?
- Are there are any existing restrictions on someone's inheritance that are no longer relevant and can be removed (e.g., age restrictions on an heir who is now 21)?
- Are there any new conditions or other concerns for beneficiaries that should be addressed? (For example, does a relative need long-term medical care or a conservatorship?)
- Are there any other types of beneficiaries that need to be revisited (e.g., charitable institutions)?
- Have you acquired or sold any real estate that should be reflected in your estate plan?
- Have you acquired or sold any significant property other than real estate (such as cars, fine art, jewelry, or other collectibles) that may impact your estate plan?
- Have you acquired or divested any financial assets during the past year? (E.g., have you acquired stock or stock options, changed bank accounts, purchased a life insurance policy, or changed its coverage.)
REVIEW… YOUR OTHER IMPORTANT DOCUMENTS
Consider if you need to similarly revise any estate planning documents, such as a document granting revocable power of attorney for financial or medical matters, an advance healthcare directive, or related papers.
REVIEW… BILLS FOR ONGOING SERVICES
The average American spends more than $3,000 a year on subscription services, and 90% of us underestimate how much we pay each month. And companies profit off of our inattention; they raise their rates, and we don't even notice. Therefore, the end of the year is a good time to review your checking accounts, PayPal, and other bill-paying services to make sure you recognize your regular account draws—know who you are paying and just how much you're paying them.
And if you aren't satisfied with what you've learned, this can be a good time to end a service, renegotiate or look for a new vendor who would be excited about getting a new client to start the year.
Now that you have a better sense of your financial health in 2022, you can take actions that may make a significant difference in the coming year and beyond.
If you have any estimated quarterly taxes due, or know you will have taxes come due in April, you can save money and heartache by paying those at the end of the year and avoiding any penalties.
GIFTS — “GIFT EXCLUSION”
Christmas and Hannukah shouldn't end your considering of gift-giving. Instead, it's time to think of it in terms of the annual and lifetime gift exemptions. In 2022, individuals can give each donee up to $16,000 under the annual gift exemption, while married couples can give up to $32,000 under the exemption.
The current lifetime exemption for federal estate and gift tax is $12.06 million and will rise to $12.92 million in 2023. However, the current statutory provision for these higher lifetime exemptions will expire on January 1, 2026, and it will drop to $6.8 million (adjusted for inflation) at that point.
GIFTS, PART 2 (EDUCATION AND MEDICAL)
Now is also the time to consider gifts to cover tuition or medical bills. Gifts for these expenses and medical bills are not considered income, nor do they count toward the annual gift limit.
But, keep in mind that the education rule only covers tuition itself—not other items such as books or living expenses—and medical donations should go to the provider of the medical services, not the recipient of the services.
GIFTS, PART 3 (THIS TIME, IT'S CHARITABLE)
Legislation passed in 2020 to help with COVID recovery provides for short-term changes in charitable giving. In 2020, individuals who do not itemize can deduct up to $300 for cash charitable gifts, and married couples can deduct up to $600. Those who itemize may be able to deduct up to 100% of their donations.
In addition to education gifts, also consider contributions to your children's (or your grandchildren's) 529 education savings accounts. While contributions to a 529 are not deductions when filing your federal income tax, Michigan does allow you to deduct 529 contributions on your state income tax filing.
PENSION / RETIREMENT / RELATED ACCOUNTS
If you have a 401K or another similar retirement account, make sure you've contributed the maximum amount. For 401Ks in 2023, you will be able to contribute up to $22,500, with an additional $7,500 allowable if you are age 50 and older.
And if you don't already have a 401K, consider starting an IRA before the end of the year and pay into it the maximum.
You may also want to talk to your estate planning attorney or tax advisor just for this: Changes in the law in may limit your future ability to convert an existing IRA to Roth IRA and have other repercussions as well.
HEALTH SAVINGS ACCOUNTS
Likewise, you can fully fund a health savings account—in 2023, up to $3,850 for individuals, $7,750 for families. These donations reduce your taxable income, and the interest you receive from HAS is tax-free as well.
Relatedly, check with your employer for “flexible savings accounts.” Normally, you have to zero out these accounts each year, but it may be possible in 2022 to have unused amounts roll over into 2023.
CHILD TAX CREDIT PAYMENTS
If your income has increased in 2022, and you've been receiving child tax credit payments based on your 2021 income, consider reporting those changes to the IRS now to reduce your payments and avoid having to repay any excess.
You can deduct large expenses for business, such as purchases of new expenses. And dig out those receipts for business meals. Due to Covid-related changes in the law, business meals in 2021 and 2022 are fully deductible. In 2023, only 50% of business meals will be deductible.
MEET WITH YOUR ESTATE PLANNER
No matter what time of year, estate planning is always an important part of planning for you and your family's future. But this year has been another extraordinary year, with so many challenges and opportunities, and the upcoming year looks like it will be more of the same. From changes in the tax law to Paycheck Protection Loans, inflation, and child tax credits, this is not a year when anyone can expect that what they've had in the previous years will be best practices for 2023.
Meeting with an estate planner to make sure that you've done all you can to protect your family is a gift that will last well past when the decorations are gone and the New Year's confetti is just a memory. Estate planning is a gift that can last for generations.