Summary

Most year-end financial checklists focus on tasks that need to be completed by December 31, but there are key opportunities early in the new year to make adjustments that can save you money. These include avoiding tax penalties, front-loading medical expenses, and setting up or adjusting your savings buckets. By being proactive with these tasks, you can avoid costly surprises and better prepare for the year ahead financially.

💼 Avoid Tax Penalties

Tax season can bring unwelcome surprises, especially for individuals in high-tax areas or those with numerous deductions. Many tax rules have changed, such as the elimination of personal exemptions and the cap on deductible state, local, and property taxes at $10,000. These changes may result in an unexpected tax bill or even penalties if enough taxes weren't withheld during the previous year. For 2018, taxpayers may avoid penalties by ensuring their withholdings match their prior year's tax obligation, or by paying an estimated tax by January 15. For those with incomes over $150,000, the required withholding increases to 110% of the prior year's tax. Free tax calculators or professional help can assist in determining if additional payments are needed to avoid penalties.

Takeaways:

• Check your withholdings to avoid tax penalties in the upcoming tax season.

• Make an estimated tax payment by January 15 if necessary to cover shortfalls.

Key Terms

• Withholding: The portion of your paycheck withheld by your employer to pay taxes.

• Estimated tax payment: A payment made to cover taxes owed if withholdings are insufficient.

• Adjusted gross income: Your income after deductions and adjustments, used to determine tax liability.

🏥 Consider Front-Loading Your Medical Expenses

Early in the year, it’s a good idea to prioritize health checkups and routine screenings to catch potential issues before they worsen. Another reason to schedule appointments early is that health insurance plans often have out-of-pocket maximums, which are limits on what you’ll pay for medical expenses in a year. Once you hit this limit, your insurance typically covers all additional medical expenses for the year. Additionally, for those with flexible spending accounts (FSAs), it’s beneficial to use these funds earlier in the year, as you can spend the full amount even before you’ve made all your contributions. This strategy can also protect you from job loss, as you won’t be required to repay the difference between what you’ve spent and contributed.

Takeaways:

• Schedule routine medical appointments early to catch issues and take advantage of insurance benefits.

• Maximize your flexible spending account (FSA) early in the year to cover medical expenses.

Key Terms

• Out-of-pocket maximum: The most you will pay for covered healthcare expenses in a year.

• Flexible spending account (FSA): A pre-tax account used for qualified medical expenses, funded by payroll deductions.

💰 Set Up (or Adjust) Your Savings Buckets

Creating dedicated savings buckets can help you manage your financial goals more effectively. These buckets are individual savings accounts earmarked for specific purposes, such as vacations, home repairs, or insurance premiums. By setting up automatic transfers to these accounts, you’ll have the necessary funds available when the time comes. Many people find that online banks are particularly useful for this, as they often allow for the easy creation of multiple sub-accounts without the fees and minimum balances required by traditional banks. If you’re already saving for these types of expenses, it’s a good time to review and adjust your contributions, especially for items like property taxes, which tend to increase annually, or car repairs, which may decrease if you’ve recently purchased a newer vehicle.

Takeaways:

• Use savings buckets to allocate funds for specific financial goals.

• Automate transfers to savings accounts to ensure you’re prepared for non-monthly expenses.

Key Terms

• Savings buckets: Dedicated accounts for specific savings goals or anticipated expenses.

• Sub-accounts: Smaller, labeled accounts within a primary savings account for organization purposes.

Conclusion

The beginning of the year is a crucial time to set yourself up for financial success. By avoiding tax penalties, planning for medical expenses, and creating or adjusting savings buckets, you can streamline your financial management and potentially save a significant amount of money. These small steps will help reduce stress and prepare you for unexpected expenses throughout the year.