Below is a post created and written by Matt Benson with Sonmore Financial.

As the year end closes in, it brings several financial decisions to consider along with it. These decisions impact tax years 2022 and 2023 and vary based on the stage of life you may be in. Those who are working professionals typically have to make open enrollment elections around health insurance, prepaid legal, life insurance, disability insurance, etc. Those over age 65 might have to consider Medicare open enrollment. Those that are on a marketplace health plan might consider what plan they need for next year. In addition, there are deadlines that impact 2022 taxes and need to be elected by December 31 of this year. Here, we will outline things to consider on each of these topics to help simplify these decisions.

Benefits open enrollment

During open enrollment, you typically will have the option to make changes around your employer-sponsored insurance plans, whether that is long-term disability life insurance or, most commonly, health insurance. As it relates to life insurance, a good consideration is to carry 10 to 12 times your income. Depending on your company plan, you may want to consider a private life insurance policy. However, if you’re in less than great health, your company‘s group plan may be the best option. In regards to disability insurance, it is common to see employers cover 60% of long-term disability insurance. Occasionally, you will have the option to purchase additional coverage during open enrollment. This is typically a very inexpensive option that we often encourage clients to consider purchasing. The last and most common election is around health insurance. It is common to see employers offer a high deductible health plan that typically has a lower premium and a more robust PPO plan that typically has a higher premium. One isn’t necessarily better than the other, although the high deductible health plans allow you the option to invest in a health savings account. If your family is in generally good health and has good cash flow, having the ability to save into a health savings account can be quite the advantage. The money that you invest into a health savings account gets triple tax benefit; it is tax deductible, grows tax free, then comes out tax free for health expenses. You are able to invest these dollars just like you would in a 401(k).

Medicare open enrollment

Medicare’s Open Enrollment runs each year from October 15th to December 7th.  During this period, you have the option to switch from a traditional Medicare Supplement to a Medicare Advantage plan, to switch your Part D coverage or to switch your traditional Medicare insurance company. 

Common reasons you might make these changes are to save on your prescription costs, save on monthly premium, or improve your provider network. In order to determine these outcomes, you should know how often you go to the doctor, the names of your doctors, and the names of the prescriptions you take.  Once you have this information, you can speak with an independent Medicare consultant to see if there are any opportunities to improve your coverage.

Year-end Deadlines

Multiple deadlines affect your financial picture for year end. Below are a handful that you might consider:

Tax loss/tax gain harvesting – If you are in a low tax bracket, you might consider realizing gains in a non-retirement account while you are in the 0% long-term capital gains bracket. This is called tax gain harvesting.

If the markets are down and you have losses in a non-retirement account, you can realize those losses to offset gains in the current year and in future years by carrying those losses forward. Additionally, if you do not have gains in the current year, you can use those losses to offset ordinary income up to $3000.

Roth Conversions – If you are in a low-income tax bracket, you can consider converting dollars from your pre-tax accounts to Roth accounts. The advantage to doing this is paying tax today at an anticipated lower rate than paying tax in the future at an anticipated higher rate.  Of course, if you expect to be in a lower-income tax bracket in the future than you are today, Roth conversions may not make sense.

Qualified charitable distributions and required minimum distributions – If you are at RMD age, you have to take your required minimum distribution by December 31. If you give charitably, you might consider doing what is called a qualified charitable distribution. This would be where you have a portion of your RMD go directly from your IRA to the charitable organization of your choice. The advantage to this is that the income is then exempt from tax.

Charitable contributions – If you give charitably and you want the deductions to occur in this year, then you need that gift to occur before the end of the year. Depending on your tax situation, it may be advantageous to bunch some of your charitable contributions into one tax year so that you can take the standard deduction every other year. See this article to explain how that works. 

Health insurance open enrollment – November 1st to December 15th – If you are retired and under age 65, you may be using a health insurance marketplace plan. During this period of time, you can switch your health plan or modify it. The reasons you might switch your plan are to access a different group of providers, to change the deductible, or modify the premium. You may also find that with strategic planning, you’re able to qualify for the premium tax credit and might be able to get a more robust health plan than what you initially thought. As it relates to qualifying for premium tax credit, remember that not all income is taxed the same way, so you may be able to keep your income lower simply by knowing where to pull funds from.

As the year comes to a close, consider these items in your year-end planning based on which of these circumstances may line up with the current state of your life and finances. If you feel your year-end plan is too important to be doing it by yourself, and you want to delegate the heavy lifting to an expert who can work directly with your CPAs and Accountants to maximize tax savings and retirement income, Sonmore Financial is here to help. We offer a no-obligation, no-cost second opinion here:

Important Disclosures

Sonmore Financial is a Registered Investment Advisor in the State of Arizona. Sonmore Financial and Fox Peterson are not affiliated. The entity and the third-party site are unaffiliated with Sonmore Financial, LLC. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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