Checklist For a Perfect Year-End Financial Planning

An unprecedented year with far-reaching economic consequences is coming to an end. It has had an impact on everyone’s personal finances in one way or another, and you need to reassess goals and firm up your year-end financial strategy more than ever before. Here are some useful tips and a checklist to assist you with that.

Managing Income and Investments

• To offset capital gains, it is prudent to sell losing investment positions near the end of the year. But it may be sensible to wait this year, with the prospect of higher taxes in 2021.

• Short-term losses are best at offsetting capital gains. Wait a minimum of 31 days before buying back a holding sold for a loss to avoid the IRS wash sale rule.

• It may also make sense to accumulate and declare income in 2020 and defer declaring expenses into 2021, with the prospect of higher taxes in 2021.

• Appraise if you need to defer buying mutual fund shares until 2021 to avert capital gains on brand new investments.

• Bunch your itemized medical expenses within the same year so as to meet the required maximum percentage of your adjusted gross income in order to claim deductions.

• In December, make your January mortgage payment (i.e., the payment due no later than January 15^th) so you can claim deduction of the interest on your 2020 income tax return.

• If possible, make sure that you maximize contributions to 401Ks, IRAs (not due until April 15^th), SEPs (due April 15^th or extension deadline), Simple IRAs (April 15^th deadline), or other qualified accounts.

Retirement Planning

• A Roth IRA allows for assets to grow tax-free and also for distribution to be taken that aren’t subject to taxation (certain restrictions apply). At times, when either your income or the value of your account is lower, are especially good for converting a traditional IRA to a Roth IRA.

• Roll over unspecified 401(k) accounts from a previous employer.

• 2020 was an RMD (Required Minimum Distribution) holiday. You can re-contribute any RMDs taken in this calendar year and save on taxes if you plough it back.

Charitable Gifting Strategy

• A DAF (Donor Advised Fund) is a low-cost, effective strategy that provides the opportunity for annual charitable gifting and allows the donor to take a full tax deduction in a single year. For tax filers who file an itemized return, the normal maximum deduction for a cash charitable donation is limited to 60% of Adjusted Gross Income (AGI), yet the CARES Act allows for a deduction of up to 100% of AGI in 2020.

• You can still do Qualified Charitable Contributions (QCDs) from IRAs if you’re over age 70½, up to $100,000.

• Money already in the DAF can be used to make gifts, in case there are cash flow constraints this year due to issues related to the pandemic. You can also use your IRA to make QCDs.

Estate Planning

• Beneficiary designations on IRAs and 401k accounts supersede your will, so confirm to review and update appropriately but we know that surviving this Wuhan virus situation is paramount as well.

• The annual gift tax exclusion is $15,000 for 2020. Those with large estates might want to revisit their estate planning tax strategy keeping in mind that the higher than normal exclusion for estate, gift, and generation-skipping taxes is set to expire in 2026, or possibly earlier.

Review the Basics

• April is the tax deadline to make an HSA (Health Savings Account) contribution, which is strongly recommended, given the account’s triple tax benefits.

• Consume the Flexible Savings Account (FSA) remaining balances. If you don’t utilize the balance in the account by December 31^st, you lose out on the chance to spend that money.

• If you got a partial refund for tuition owing to an extended spring break, and if that money came from a 529 plan, you need to put it back in there or be prepared to pay penalties and tax on that non-qualified distribution.

• Check with your CPA to see if you’re on track with your payroll withholding. If you didn’t withhold enough throughout the year from your paycheck, you’ll be subject to an underpayment penalty.

Lessons Learned from 2020

Save money to fund your emergency account and put aside more for the future. Invest in insurance to protect your and your family’s financial future. Ensure that you have medical and financial power of attorney in place. Finally, work on building alternative income streams even in a lower tax environment.