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The end of the year is an important time to make financial decisions that can impact the year ahead – and for years to come.
From your job, to your savings and investments, to your spending and giving, here are five steps you should consider taking before December 31 that can help set you up for financial success in 2023:
1. Make sure you haven’t paid too little tax on your 2022 income
You don’t want to end up paying interest and penalties or a big tax bill next year because you didn’t take enough tax from your paycheck this year. Even if you were recently laid off, it’s important to double-check so you don’t take an unexpected tax hit. And, if you’re retired, make sure you’ve paid the appropriate tax on your retirement withdrawals.
The IRS says one way to see if you’re on track to pay the right amount of income tax is to pay the same amount as you did in 2021 or, for high-income taxpayers, maybe a bit more. Keep in mind that even if you got a tax refund last year, with no stimulus payment for 2022 and a less generous deduction for charitable donations, you may receive a smaller refund in 2023.
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You can also complete a “payroll report” by accessing the Tax Withholding Estimator on the IRS website to review the amount of tax withheld from your pay. You may have time to change your deduction for the last pay period of the year by submitting a new Form W-4 to your employer. If it’s too late to withhold tax this way, or if you’re self-employed, you can send an estimated tax payment directly to the IRS. The deadline for fourth quarter payments is Tuesday, January 17, 2023.
2. Increase your 401(k) contributions
A 401(k) retirement savings plan is one of the most sought-after employee benefits. You can contribute up to $20,500 to a 401(k) plan in 2022 — or up to $27,000 if you’re 50 or older.
If you can’t afford to contribute the maximum amount to your 401(k), many financial advisers advise putting at least enough money to get your employer’s matching contribution, if offered. It’s free money!
Increasing contributions to a traditional 401(k) plan can reduce your adjusted gross income while boosting your retirement savings. But with only one pay period remaining for 2022, you should make contribution changes immediately.
3. Boost your emergency savings
Having easy access to cash to cover unexpected expenses is also essential. Yet a new Betterment at Work survey finds only 59% employees currently have an emergency fund – down 7% from last year, leaving 41% without any sort of safety net.
With recent layoffs and worries about an impending recession, getting a temporary job can be very helpful. A part-time job in retail or a restaurant or doing holiday decorating for a fee can help you find more money to save.
The Federal Reserve’s interest rate hikes this year have led to higher rates on many online-only savings accounts. Some of these accounts pay up to 3.5% interest with no minimum balance, according to Bankrate.com.
4. Plan your expenses before you buy
If you just can’t afford to save more right now, just make sure you don’t overspend. Determine how you plan to pay for a vacation purchase before purchasing it. Using cash instead of credit can help you stick to your budget and stay out of debt. Some merchants will charge you less for paying cash to avoid credit card transaction fees. By paying cash, you could, in some cases, pay 3% less than the purchase price. Digital payment apps – ApplePay, Venmo or CashApp – can also work like paying cash.
Using a credit card gives you more protections as a consumer than a debit card and you can also get rewards: cash back, or airline or hotel points. Choose a low-rate card or a card with a 0% interest introductory offer, especially if you think you can’t or don’t want to pay your balance in full at the end of the billing cycle.
Beware of store credit cards. According to CreditCards.com, the average credit card from a retail-only store charges over 28% interest.
Also, be careful if you use buy now, pay later, a popular option for online shopping at many retailers. Although you can spread out payments for interest-free buy-now-pay-later purchases, loans aren’t subject to the same regulations that apply to credit or debit cards. There are also fewer purchase protections, including the ability to dispute a charge if you purchased a good or service that didn’t deliver as promised.
5. Think about how you will contribute to charity this year and next
It may be more difficult to claim a charitable deduction this year than in the past two years. You can no longer automatically impose an above-the-line deduction for cash donations; you must itemize the deductions on your 2022 tax return.
Still, most people will probably choose not to itemize, as it might not offer as much tax relief as the standard deduction. For 2022, the standard deduction is $12,950 for single filers, $19,400 for single-family taxpayers, and $25,900 for married couples filing jointly.