Your Year-End Financial Checklist

Believe it or not, the year is coming to a close. If you want to finish strong and set attainable goals for 2023, here’s a handy, actionable checklist to help you navigate upcoming expenditures.  

Review Your Spending and Create a Budget

This might seem like Finance 101, but it’s a tried and true method that works. Take a look back to see where your money went. When you’ve evaluated your patterns of spending, you can reset priorities for the New Year, assuming you want to make changes. If you do, sit down and create a budget. Your tax professional will probably have a downloadable tax planning guild so ask them first, but here’s an example of a family-friendly free, downloadable template to get you started on your 2023 plan. 

Rethink Your Savings

If you already have a healthy amount in savings, congrats. Make sure it’s an account that’s interest-bearing and you have the best rate. However, if you had to dip into your emergency savings, then chart a course to replenish it. If you don’t have an emergency fund, it makes good sense to start one. A smart rule to consider is having six months of income saved up, should your heater go out, you experience a sudden job loss, or suffer unforeseen medical expenses that your insurance doesn’t cover. A no-nonsense way to begin is to automate a certain amount each month that will be deducted from your paycheck. You’ll begin to accumulate money in no time. Best of all, you’ll never miss it.

Evaluate Your Debt

Have you made progress in paying it down? Or have you gone the other way?  If you’ve eliminated your debt, once again, congrats. If you’ve increased your debt, don’t despair because there are some easy ways to cut expenses. Slow down on eating out. Review your subscriptions and see which ones you really need. Here’s a list of more areas to consider. Another way to get rid of the shackles of debt is to apply for a consolidation loan. You might also use the debt snowball method—starting with the smallest debt and working your way up to the largest. Or the inverse, the debt avalanche, where you pay off high-interest rate balances first. 

Contribute to Your 401(k) by Dec. 31

You still have time to do this, but make sure it happens before the clock strikes midnight on Dec. 31. If you’re fortunate enough to receive a year-end bonus, you might want to put as much of it as you can toward your 401(k) plan. For the New Year, increase the amount you’re contributing. Just one or more percentage points higher can make a big difference. Finally, if your company offers a match that you have yet to take advantage of (read: max out), do so before it’s too late. 

Consider a Roth Conversion

If you’ve experienced a loss of income this year, you may be in a lower tax bracket. This means you can take advantage of your situation by converting some of your pre-tax assets like a Traditional IRA into a Roth IRA. If you’ve earned too much to convert to a Roth IRA, a back-door Roth IRA contribution might be the way to go. Here’s how you do it: Deposit money into a non-deductible Traditional IRA, then convert that IRA into a Roth IRA. But before you do anything at all, consult your tax advisor, as there are potential costs and tax liabilities that might come up.

Check your FSA Balance

An FSA (Flexible Spending Account) is a great benefit if your employer offers it. However, check your balance to see how much you have left because the rule is: Use it or lose it. That said, many companies offer a grace period until mid-March to spend what you have left, though not all do. Make sure to inquire about the rules of your account before the New Year.

Get a Free Credit Report

When was the last time you checked your credit? If you haven’t done so, now’s a good time because looking back can help you plan ahead. Here’s a great place to get a free report. If you notice any errors or discover any identity theft, you can immediately take steps to correct them and start with a clean slate for 2023.

While taking care of financial matters at the end of the year can be a love/hate kind of thing to do, if you spend a little time now, the coming days might be substantially merrier and bright.

Sources

https://www.bankrate.com/personal-finance/end-of-year-financial-checklist/

https://www.bankrate.com/retirement/what-is-a-backdoor-roth-ira/

The 2022 Tax Guide

Now is the time of year to do everything you can to minimize taxes and maximize your financial health with proper year-end planning. In this article, we’ll look at several actions to consider taking before the end of 2022.

Thoughtfully Harvest Losses and Gains Before Year-End

Tax loss harvesting by selling securities at a loss to offset capital gains is a classic year-end planning strategy. Just make sure not to violate the wash sale rules. This means you can’t buy back the same security or a substantially identical one within 30 days of the sale. 

Reinvest Capital Gains into Opportunity Zones

Another way to offset capital gains is to reinvest those gains into a qualified opportunity fund (QOF). To be eligible, you must make the investment within 180 days of the sale of the asset-bearing gains. QOF investments allow you to defer the recognition of the capital gains tax on the original investment. The details and exact rules can be tricky, so it’s best to check with your tax advisor before making this type of transaction.

Consider Installment Sales Where Applicable

When a taxpayer sells a private asset such as real estate, a business, or private equity in exchange for a series of payments over multiple years through a promissory note, this can constitute an installment sale. Installment sales are generally taxed with each payment representing a portion of the proceeds; return of basis, interest, and gain are recognized over the life of the note.

There are situations in which installment sales can be structured so that gains are not recognized until principal payments are recouped. If you are considering selling an asset via an installment sale this year-end or next, consult with your tax advisor to determine if it’s possible to structure the sale to defer gains.

Funding Retirement

If you can contribute to a retirement account, now is the time to see if you need to make additional contributions or top-up to the full amount allowable. As you review your situation, keep in mind the annual maximum contribution limits for 2022.

  • IRAs – $6,000. If you are 50 or older, it’s $7,000.
  • 401(k)s/403(b)s —  $20,500. If you are 50 or older, it’s $27,000

Also, converting assets from a traditional IRA to a Roth IRA may be a smart move if: you believe your tax rate will be higher in the future; you can afford to pay the taxes now with spare cash, and you don’t plan to leave the IRA assets to charity.

Take Your Required Minimum Distributions 

The annual deadline to take required minimum distributions (RMD) from your own or inherited retirement accounts is Dec. 31, 2022. It’s important to take RMDs because there is a 50 percent penalty on amounts not distributed. The amount needed to be taken was determined on Dec. 31, 2021, even though the value of the investment has likely fluctuated significantly since that time. RMDs are based on a calculation of age and amount of assets. There are online calculators to help you figure out the amount you need to take.

Giving to Charity

Some taxpayers believe that the deduction for charitable donations is no longer applicable to them since it can be hard to make donations large enough to exceed the standard deduction. One strategy to overcome this challenge is to cluster your donations. Instead of making equal gifts every year, consider making more substantial gifts all in one year instead.

When it comes to making donations around year-end, it’s important to understand the rules on timing and when a gift is effectively deemed given for tax purposes. Here are the basic rules for the timing of charitable donations.

  • To give to charity by check => the date the check is mailed
  • Gifts of stock certificates => when the transfer occurs, according to the issuer’s records
  • Gifts of stocks by electronic transfer => when the stock is received, according to the issuer’s records
  • Gifts by credit card => date the charge is made

Conclusion

As we enter the final part of the year, now is the time to take stock of your financial and tax situation to see if there are any moves you can make to minimize your 2022 tax liabilities and maximize your wealth.

Inventory Valuation: How Companies Can Calculate It

By 2021, there were 20,000 warehouses in the United States and growing, according to the United States Bureau of Labor Statistics (BLS). With more warehouses expected to pop up in 2022 and beyond, one important consideration for businesses of all sizes is to keep track of their inventories. With different tracking and valuation methods, it’s important to understand how they work and what they can tell business owners.

Before inventory can be valued, it’s imperative to understand how it can be expressed mathematically:

Ending Inventory = Starting Inventory + Net Acquisitions – Cost of Goods Sold (COGS)

Now that inventory is better defined, understanding different approaches to inventory valuation are essential to keeping track. The first type of inventory valuation is referred to as FIFO or First In, First Out. This means that businesses sell their earliest produced inventory first and new inventory last. 

Assume a company produces 500 widgets on day 1, costing $2 per widget. The same company then produces 500 widgets on day 2, costing $2.50 per widget. This method says that if 500 widgets are sold over the next week, the cost of goods sold (COGS), derived from the Income Statement, is $2 per widget because that’s how much the first 500 widgets cost to produce for inventory. The remaining widgets, 500 widgets at a cost of $2.50 per unit, would be accounted for under the ending inventory on the balance sheet. 

One consideration, especially in an inflationary environment, for remaining inventory on the balance sheet is that a business might see a higher tax obligation. This is likely to occur because of higher net income due to a lower cost basis from the older inventory when assessing the COGS. Newer, more expensive inventory will naturally lead to a lower tax basis, especially if inflation falls and the retail cost is mitigated by decreased demand.

The next option is referred to as LIFO – or Last In, First Out. This means that businesses sell what they’ve produced first, then move on to the older inventory. If any inventory is left at the end of the accounting time frame, it’s accounted for accordingly. Assuming the same 500 widgets were sold in the particular accounting period, the time frame’s COGS would be $2.50 per widget, with the 500 widgets left over in inventory valued at the $2 per widget cost.  

One important caveat to this type of valuation concerns inventory that’s perishable or becomes obsolete quickly (cell phones, televisions, etc.). It is not an effective method because the product will either spoil or become worth next to nothing due to highly competitive industries. For this approach, using the most recently produced goods first would lend their COGS basis to be higher. In one respect, the higher COGS basis can lower profits, but can also offset taxes due to the same effect. The third type of inventory valuation is referred to as Average Cost. This method is a way to blend LIFO and FIFO, which takes the average of inventory across all production and storage timelines. This approach averages costs in proportion to the number of widgets produced in each run, then calculates the mean cost to determine the ending inventory and COGS figures. 

[(500 x $2) + (500 x $2.50)]/1,000 = ($1,000 + $1,250)/1,000 = $2,250/1,000 = $2.25

Therefore, the average cost for inventory using this method would be $2.25 per widget.

With different types of inventory valuation explained, there are considerations that businesses should be mindful of for each approach. This can make a difference to those running the company and potential investors and lenders contemplating investing in or loaning the company money.

What is Datafication, and Should Business Leaders Take Notice?

Data has become a primary asset for businesses today. Consequently, the survival of a business in our data-driven environment is highly dependent on the ability to have total control over data storage, extraction, and manipulation.

As businesses continue being bombarded with vast volumes of data, datafication has become a big trend that provides a solution to turn data into quantifiable, usable, and actionable information. 

What is Datafication? 

The term datafication was coined by Kenneth Cukier and Victor Mayer-Schöenberger in 2013 when they explained it as the transformation of social actions into quantifiable data.

Today, much data is collected at the point of contact with any technology device. Aside from data such as text, images, and numbers, there are logins, passwords, device activity logs, clicks, interaction times, and more. Datafication helps translate all of these human activities into data, which is then repackaged in a form that offers value.

In business, datafication means converting every activity of a business model into actionable data. This has been enabled by a rise in technologies such as artificial intelligence, machine learning, big data analytics, and predictive analytics. 

It’s worth noting that datafication is not the same as digitization. While datafication is about taking all aspects of life and turning them into a data format, digitization involves converting analog content, such as images and text, to a digital format.

Examples of Datafication in Real Life

There are various ways datafication has been applied in real life, including:

  1. Social media platforms – a lot of data is found on social platforms through profile updates, preferences, reactions, comments, and posts. Such information is used for customer profiling.
  2. Ad personalization – tech giants such as Facebook, Google, Apple, and Amazon are already using collected data in their storage to personalize their ads and target potential customers.
  3. In customer relationship management – data collected through language and tone in emails, social media, and phone calls are used to understand customer needs and wants as well as buying behavior and personalities.  
  4. Human resources – HR uses data obtained from social media or mobile apps to discover characteristics and personalities when looking for potential employees. They also use the data to assess employee productivity. This means that it may no longer be necessary to take personality tests, as the collected data can be analyzed to check if a person matches the company culture and role for which he applies.
  5. Insurance and banking – understanding the risk profile of a customer applying for insurance or a loan, as the data is used to assess the client’s trustworthiness. 

Datafication for Competitive Advantage

With the above use cases, it is evident that businesses can leverage datafication to help improve operations, thereby increasing productivity and revenue.

For instance, collecting real-time customer feedback can help improve products and services. Additionally, it becomes easy to determine and predict sales by analyzing data from social platforms such as Facebook, Instagram, and Twitter.

The information collected from social media, emails, and other digital platforms is then used to create personalized campaigns, effectively targeting the most interested audience.

How Businesses Can Implement Datafication

Any trending technology that presents benefits to a business comes at a cost. Luckily, cloud computing eases datafication for businesses as they don’t have to worry about acquiring necessary hardware and software. With readily available software as a service (SaaS) or platform as a service (PaaS) technologies, businesses need only to define the goal they want to achieve with the data collected.

The main concern of a business remains the proper implementation of datafication. To begin with, it is best to ensure that the right technology – such as mobile devices, voice assistants, wearables, and IoT – is used.

Next is to use appropriate platforms. Using the right platform will help effectively extract data that a business needs. Such platforms should also analyze massive amounts of data and produce reports that enhance decision-making. 

Another critical factor is to have a centralized repository where all authorized people in the organization can access the data.

Finally, it’s crucial to have skilled professionals in data infrastructure, data management, and data analytics to evaluate and manage the data. This could either be an in-house team or outsourced.

Conclusion

Businesses that wish to remain relevant must consider datafication as part of their digital strategies. However, as datafication enters digital transformation, its successful implementation will require attention to data protection through adhering to legal requirements, technical measures such as access control, and best business practices.