The Mount Vernon-Lisbon Sun newspaper is hoping everyone gets off to the a good start this year, and has visited with a number of financial institutions in the community for their tips and advice on how to start 2022 on the right foot financially.
Financial Wellness
tips from Sargent
and Fortmann, CPAContribute to Retirement Plans such as 401(k)s, etc.
If you are covered by a retirement plan at work, such as a 401(k) or Simple IRA, you should contribute as much as you can afford to the retirement plan. This puts away money for retirement, and also reduces your current taxable income and current taxes.
Your employer may have a matching contribution. At a minimum, you should at least contribute enough so that you receive your employer’s maximum matching contribution. You don’t want to leave that benefit on the table.
Some employers have added choices in recent years to put some or all of your contributions into a Roth option.
If your employer does not offer a retirement plan, you could set up and contribute to your own IRA or Roth IRA.
If you are self-employed and have not yet done so, consider setting up a retirement plan in conjunction with your business. There are several options available, such as a Simple IRA, Simplified Employee Pension (SEP), and a 401(k).
Will my budget allow me to save more?
Related to the first item above, could I afford to save more for retirement?
Am I saving for emergencies? If you are able to save for emergencies on a regular basis, maybe you won’t have to put that auto repair or furnace repair on a credit card.
There have been a number of tax law changes in the past year as well.
Small Charitable Contribution for Non-itemizers. You can again take a charitable deduction even if you don’t itemize deductions, albeit a small deduction. In 2020, it was limited to $300. For 2021, that amount is increased to $600 if you file a joint return with your spouse.
Advance Payments of the Child Tax Credit. The tax credit for dependent children was increased for 2021, and part of it was paid “in advance” on a monthly basis in the last half of 2021. This may be a source of confusion for many people, because part was paid in advance and some is claimed when you file your 2021 tax return. Some people opted out, but the opt-out process was difficult. It is my understanding that the IRS will be sending out letters detailing the amount people received. It is very important that you use this letter when preparing your tax return, or give it to your tax preparer if you are using a paid tax preparer.
Unemployment Compensation. During the 2020 tax season (in the spring of 2021), the IRS made a retroactive law change exempting the first $10,200 of unemployment compensation from taxation. However, that is not the case for unemployment compensation received during 2021; it is all taxable. If you didn’t have taxes withheld from your unemployment compensation, you could be in for a tax surprise.
3rd Stimulus Payment. The government issued a 3rd COVID stimulus payment in the spring/summer of 2021, up to $1400 per person. This could have an impact when you file your taxes. It is important that you know how much of this stimulus payment you received. If you don’t think you received a payment, you should confirm that is the case.
Financial Wellness Tips from Virlee and Pearson CPA
• Organize tax documents. Many of the deductions and credit taxpayers are entitled to require document support. Assembling these documents throughout the year can ease the preparation and filing process. For the 2021 tax filing, taxpayers should resolve to keep track of a variety of new documents they may need when filing their tax return including IRS letters regarding economic impact payments and advance child tax credit payments.
• W-4 form. Form W-4 is provided to an employer when you start a new job and is used to determine how much income tax is withheld from pay. Taxpayers should keep their W-4 up to date by revising it for significant life changes.
• Tax deadlines. It is to a taxpayer’s advantage to be alert and prepared for tax deadlines. There are deadlines to take action for many tax benefits, such as IRA, HSA, and 529 plan contributions.
• IRS Correspondence. It is important to respond in a timely manner to IRS correspondence to minimize penalties and interest.
• Consider hiring a professional tax expert. Tax laws are not getting any less complicated. A tax professional can help identify ways to reduce taxes.
What items should people be reviewing in their finances at the top of the year?
Reviewing and updating Form W-4 for withholdings
Eligibility for health savings account contributions
Retirement plan deferrals/contributions
Are there any changes to the tax laws that taxpayers should be wary of this year?
• You Don’t Have to Itemize to Claim Charitable Donations. Taxpayers who d o not itemize deductions may qualify to take a deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.
• Your monthly Child Tax Credit Payments May Increase or Decrease Your Refund. The child tax credit increased to $3,000 for children claimed as a dependent under the age of 18, or $3,600 if under 6. Families who received advance payments will need to compare the advance child tax credit payments that they received in 2021 with the amount of the child tax credit that they can properly claim on their 2021 tax return. Whether advance payments were received or not, a reconciliation is required on the 2021 tax return to determine if an overpayment is to be paid back or to claim a credit for the remaining amount of the child tax credit. In January 2022, the IRS will send Letter 6419 with the total amount of advance child tax credit payments taxpayers received in 2021. Individuals can also create or log in to IRS.gov online account to securely access their child tax credit payment amounts.
• The child and dependent care credit was also enhanced for 2021 only and is now refundable. The expenses subject to the credit increased to $8,000 for one child and $16,000 for multiple children.
• 2021 Recovery Rebate Tax Credit for Third Stimulus Payments. Individuals who didn’t qualify for the third economic impact payment or did not receive the full amount may be eligible for the recovery rebate credit based on their 2021 tax return. Taxpayers will need to file a 2021 tax return, even if they don’t usually file, to claim the credit. Individuals will need to know the amount of their third economic impact payment to calculate the recovery rebate credit amount. IRS mailed Notice 1444-C to people who received a third economic impact payment. In early 2022, the IRS will send Letter 6475 confirming the total amount of the third economic impact payment and any plus-up payments.
• Required minimum distributions are back for 2021. The suspension of required minimum distributions only applied to 2020. Anyone who is at least 72 years old by the end of the year is required to take an RMD for 2021.
• Unemployment compensation received in 2021 is fully taxable. The American Rescue Plan Act made up to $10,200 of unemployment compensation ($20,400 for married couples filing jointly) exempt from federal income tax for household with an adjusted gross income less than $150,000. The exemption applied to unemployment compensation received in 2020 only.
• Starting in 2021 student loan debit incurred for post-secondary education canceled, forgiven, or otherwise discharged for less than the amount you owe is suspended from being considered taxable income.
• The American Rescue Plan enhanced the premium tax credit for 2021 and 2022 for health insurance purchased through an Obamacare exchange (e.g., Healthcare.gov). The percentage of annual income that households are required to contribute toward the premium is reduced. The credit can also be claimed by people with an income above 400% of the federal poverty line.
• For 2021 and 2022, business meals at restaurants are 100% deductible. This does not apply to meals purchased at grocery stores, convenience stores, or vending machines that typically sell pre-packaged items, which are still 50% deductible.
• An eligible educator defined as a K-12 teacher, instructor, counselor, principal, or aide for at least 900 hours a school year can deduct up to $250 for unreimbursed expenses used in the classroom, COVID-19 protective items, or for professional development.
• The Iowa tuition and textbook credit has increased to 25% of the first $2,000 of qualifying expenses for each child in grades K-12. Mask/face coverings and other antibacterial items required for school attendance qualify for the credit.
When should work start on preparing for this year’s tax season?
• Start on tax preparation early. Americans faced a long list of tax changes for the 2021 tax year including the additional child tax credit, stimulus payments, pandemic unemployment assistance, grants, and PPP forgiveness. There is a lot of extra paperwork and considerations beyond the standard W-2s and 1099s for many taxpayers this year. Being proactive can provide opportunities for tax planning strategies to reduce your tax bill.
• To ensure success in managing your tax return, focus on timing, security, and organization. By being engaged in the process, you enable your tax preparer to provide you with a timely, accurate return and the best tax planning advice.
Anything else you can think of?
At the present time, President Biden’s “Build Back Better” has not passed the Senate and it’s not the law. Items still in the bill as of today:
1. Extend 2021 child tax credit for one year,
2. Raise SALT deduction to $80,000 starting in year 2021,
3. Apply 3.8% net investment income surtax to active business income,
4. Add high income additional surtaxes,
5. Limit large IRAs
Financial wellness tips from Ann Koppenhaver, Koppenhaver and Associates:When it comes to financial wellness and planning, Ann Koppenhaver said that it’s best to make any plans or changes for your financial wellness in the year prior to the coming tax year.
“Any changes you look at making should be made with the guidance of your investment attorney or Certified Public Accountant,” Koppenhaver said. “Planning is a continual process you should be doing over the course of a year.”
Her other key tip for all tax customers – stay organized with all of your tax documents.
“I tell my clients to keep a pocket folder with all of their tax information handy throughout the year, so when it comes time to file taxes, items are ready in a nice, neat area,” Koppenhaver said.
Reviewing your financial investments every quarter is something people should do as part of the maintenance of their financial wellness as well.
Financial Wellness tips from Mount Vernon Bank and Trust CompanyThe team at Mount Vernon Bank & Trust said the new year is a great time to take inventory of your finances. They offered the following tips:
Build An Emergency Fund:
Have funds set aside for unforeseen/unplanned expenses (an appliance needs to be replaced/repaired, car problems, medical issues, etc.). Start a savings account and set up an automatic monthly or biweekly transfer from your regular checking account. Small amounts add up over time.
Traditional IRA – ROTH IRA:
-Start planning for your retirement now. Does your employer offer a 401(k) or other retirement option? Does your employer match contributions? Don’t leave free money on the table.
-If you have earned income, should you contribute to an IRA or a ROTH IRA. Check with your tax preparer to see if you qualify.
Budget:
-Review your 2021 income and expenses; create a budget for 2022 to help keep your spending in check.
Inventory:
-Take an inventory of your accounts and make note of any changes made (new accounts, closed accounts, changed beneficiaries).
Life Changes:
-Has there been a change in your marital status? Has someone passed away? Review accounts (life insurance, retirement plans, IRAs, annuities, bank accounts) that have beneficiaries to make sure they are current
Insurance:
-Review your policies to see if they still meet your needs.
Credit Report:
-Request and review your credit report to look for any changes or errors. To request your report, visit annualcreditreport.com or call 1-877-322-8228.
Debts
-Review your debts (credit cards, mortgage, auto loans, student loans, etc.). It might be a great time to meet with a loan officer and discuss consolidation or refinancing options.
Financial Wellness Tips from Reid Hockenson, Farm Bureau Financial services:What advice would you give to people at the beginning of the year to kick their finances off correctly?
Meet with a financial advisor to review several factors for your retirement planning including your budget. It’s never too early to get started and getting started, no matter how late it may be is the key. At least review 401k-savings amount (increase by 1% annually), rebalance allocations (at least annually), update beneficiaries if needed.
What items should people be reviewing in their finances at the top of the year?
Sit down and look at income and expenses (key more money coming in than out). Also review needs vs wants. A good goal is to try to save 15% or more of income. (Including company match for 401k’s, etc.)
What financial literacy items should youth and adults work at better understanding in the coming year? Any places you’d recommend they go to brush up on those items?
There is plenty out there. Use resources at your library, audiobooks, yahoo finance, etc. One book to recommend for all to read is “Think Rich, Grow Rich” by Napoleon Hill
Financial Wellness tips from Brenda Langenberg, Hills Bank:What advice would you give to people at the beginning of the year to kick their finances off correctly?
If you don’t already have a budget, the new year is a great time to start one. The first step is to figure out where your money is currently going. You can track your spending manually, but I recommend using an app or digital service to do it automatically. When you don’t have to spend time and energy to monitor your cash flow, it makes it much easier to create a budget that works for you.
Once you figure out where your money is going, you’re ready to create a budget to help determine where it should be going. Remember to set aside money for savings and semi-regular expenses that may not occur every month.
What items should people be reviewing in their finances at the top of the year?
One item a lot of people don’t consider is their current debt: private student loans, credit card debt, auto loans, mortgages, etc. Depending on your financial situation, credit score, and other factors, you could save money by refinancing that debt. Refinancing can give you a lower monthly payment, a lower interest rate – or both. I recommend talking with a banker to explore your options, as refinancing debt can really make a big difference for your monthly bottom line and reduce the amount you pay over the term of the loan.
What financial literacy items should youth and adults work at better understanding in the coming year? Any places you’d recommend they go to brush up on those items?
There’s a whole lot to learn in the world of personal finance. Differences between credit and debit cards, how interest works, ways to build your credit score, saving for retirement, etc. You can find a number of sites online that can help you explore these topics – including our own Financial Education section on hillsbank.com – but sometimes it’s easier to talk with a personal finance expert to get answers to your questions. I recommend getting in touch with a banker (whether in-person or online) to get advice for your particular situation. We’re always here to help.
Anything else you can think of?
A lot of folks aren’t aware of different ways financial institutions can help them save money, and they end up keeping large amounts of cash laying around. But this can be unsafe. When you store your money in an FDIC-insured financial institution, you don’t have to worry about losing it. You also have the opportunity to earn interest through things like savings accounts and certificates of deposit (CDs). Finally, some financial institutions (like Hills Bank) offer ways to save money automatically by rounding up your debit card purchases or by using online banking features to help you set savings targets to meet your goals. Check with your financial institution to make sure you’re not missing out on ways they can help you save.