2020 is almost over. If you’re like many people, you are ready for the New Year. But don’t race into 2021 without being prepared. Financially preparing for the New Year involves a mix of taking advantage of COVID-related breaks that expire at the end of 2020 as well as revising your budget and savings plans for 2021.
Here’s a list for successfully wrapping up 2020 and stepping into 2021 financially prepared:
- Consider increasing your charitable contributions before the end of the year – two provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act make it advantageous to do some charitable giving before the end of 2020. Taxpayers who don’t itemize can take a one-time $300 above-the-line tax deduction for cash donations to a qualifying charity.
For those who itemize, the CARES Act includes a provision that allows taxpayers to take deductions for charitable contributions up to 100% of their 2020 adjusted gross income (AGI), compared to the usual 60% of AGI. Contributions in excess of 100% of AGI may be carried over to next year. Again, the contributions must be cash and paid to a qualifying charity.
- Take advantage of expiring credit card reward programs – credit card issuers have rolled out a number of programs to encourage holders to use their cards for everything from wireless phone and streaming services to Uber Eats, takeout and grocery purchases. The rewards range from extra points to statement credits. For travel, cards have also partnered with hotel chains to offer free nights for stays booked before the end of the year. Many of these programs expire at the end of 2020. Check with your credit card company for a list of benefits. You may want to purchase some items for 2021 now. But don’t go crazy spending!
- Check your withholding – unemployment benefits are taxable income and must be reported on your 2020 tax return. If you received any unemployment compensation in 2020, you will need to make estimated tax payments for the tax due. If you returned to work, you can adjust the withholding from your paycheck to include the amount due on previously received unemployment benefits.
- Watch out for identity theft – ID theft is up during 2020. In year’s past, identity theft tends to increase around the holidays so be extra cautious this season. One thing you can do is to regularly monitor your credit report. Look for any inaccurate information that could signify a thief has used your identity to obtain a credit card or loan. All three major credit reporting agencies are offering free weekly credit reports through April 2021.
- Continue funding and maxing out contributions to retirement savings – if you haven’t already contributed to your 401(k) this year, you have until December 31. If you have an IRA, you have until April 15, 2021 to make your tax deductible contribution for tax year 2020.
For 2021, keep saving for retirement. If you can, max out your tax deductible contribution. The maximum allowable tax-deductible contribution in 2021 for IRAs and Roth IRAs is $6,000. The maximum for 401(k) contributions is $19,500, plus an additional $6,500 if you are age 50 or older.
- Evaluate your expenses and set your budget – first off, set a budget for holiday spending for 2020; don’t’ just shop freely. Then look back over 2020 and set a plan for 2021, keeping in mind you may be able to return to more regular activities as the year progresses and therefore see an increase in expenses over 2020.
- Reduce debt – reducing debt can free up funds and allow you to save more for retirement, children’s education and other financial goals. Plus, lowering debt has been shown to lead to less stress and better mental health, both of which are key during the pandemic.
- Evaluate your emergency fund — as you set your budget for 2021, revisit your emergency fund. Have you set aside six-month’s worth of expenses? Remember to consider any expense changes for 2021. If you have not fully funded your emergency fund, make it a priority to fully fund this account in early 2021.
If you have questions about the deductibility of charitable contributions, budgeting, or planning for retirement, call us. We can help.