After the train wreck that was 2020, you may well question whether its worth trying to plan anything. But knocking off a few financial tasks early in the year can better prepare you for whatever 2021 has in store.
FILE YOUR TAX RETURN ASAP
Filing your tax return early typically means getting your refund sooner. Not only that, it could thwart refund-stealing identity thieves. Also, If you were owed a stimulus check in 2020 but didnt get one, or should have gotten more, you can claim the missing money on your return.
If you owe the IRS, its better to know sooner rather than later. Youll have more time to find the money or arrange a payment plan.
Also, unemployment checks are generally taxable. Many people who received last years extended jobless benefits may face a larger-than-expected tax bill this year, tax experts say.
CHECK YOUR WITHHOLDING
Once your 2020 tax return is prepared, you can use that and your first pay stub from 2021 to see if youre on track with tax withholding. A good tax withholding calculator can help you determine how to adjust the amounts taken from each paycheck. Then, contact your employer if you need to make changes.
If youre self-employed, you may need to make estimated quarterly payments. You could consult a tax professional to find out how much those should be.
ADJUST YOUR RETIREMENT SAVINGS
Consider increasing and diversifying your retirement contributions. After you take full advantage of any available company match in a 401(k) or 403(b), look into funding a Roth IRA. Financial planners often recommend having at least some money in a Roth so you can better control your tax bill in retirement. If your income is too high to make a direct Roth contribution the ability to contribute starts to phase out at modified adjusted gross income of $140,000 for singles and $208,000 for married filing jointly you could consider converting a portion of an existing traditional IRA.
CHECK YOUR SPENDING
Budgeting apps and personal finance websites can help you see where your money went in 2020 and help you make a plan for 2021. You can also look back over bank or credit card statements. But even if you cant get the full years worth of transactions, reviewing just a few months can show you some patterns and help you identify spending you want to change.
SET UP YOUR SAVINGS BUCKETS
Preparing for irregular but predictable expenses can help you feel less panicked when those bills arrive. These expenses can include insurance premiums, property taxes, car and home repairs, vacations, back-to-school shopping and holidays. Check your spending in each of these areas for the past few years to ballpark how much to save this year.
Once you have your savings goals for each category, consider setting up separate savings accounts at an online bank that doesnt charge monthly fees. You can divide the amounts by the number of paychecks youll get before the money is needed, and set up automatic transfers from your checking account to the appropriate savings account after each payday.
PUT CHARITABLE CONTRIBUTIONS ON AUTOMATIC
Most charities prefer getting regular contributions throughout the year, since the steady income helps them plan. You may discover you can give more if youre not trying to squeeze your contributions in with other year-end spending. You can use your banks bill pay system to send monthly checks or arrange with the charity to charge a credit card.
SPEND YOUR MEDICAL FSA
Flexible spending accounts are employer-provided benefits that allow you to put aside tax-free money for medical or child care expenses.
If you signed up for your employers medical FSA, try to spend that money as early in the year as possible. You dont have to wait until the money is taken from your paycheck to use it for eligible health care expenses. (Thats different from child care FSAs, which dont allow you to spend money before you contribute it.)
Spending early has a few advantages. You dont risk leaving money in the account and potentially losing it. (Many employers extend the deadline for using the money past Dec. 31, but at some point unspent money is forfeited.)
Incurring medical expenses early in the year can help you meet insurance deductibles, too, so the rest of your health care can cost less. Also, if you leave your job during the year, you dont have to finish making FSA contributions. In other words, you can spend the full amount you had planned to contribute, up to $2,750, without actually having to contribute the full amount.
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This column was provided to The Associated Press by the personal finance website NerdWallet. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of Your Credit Score. Email: [email protected]. Twitter: @lizweston.
RELATED LINKS:
IRS: Economic Impact Payments https://www.irs.gov/coronavirus/economic-impact-payments
NerdWallet: How to Save for Retirement http://bit.ly/nerdwallet-saving-for-retirement
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