Year-end financial planning tips

by Badgley Phelps | Jan 08, 2021

By Financial Planning Team



Holiday plans and tasks can dominate our “to do” lists this time of year. It is also the time to consider some year-end tax saving and planning strategies. We think these should be at the top of your list.

Tax-loss harvesting

Looking at taxable accounts, selling certain taxable investments at a loss could offset any capital gains you’ve realized during the year. If you have underperforming positions that would generate a capital loss if sold, consider selling them prior to the end of the year to offset realized capital gains for the year. If your losses exceed your gains, you can use up to $3,000 of the excess losses to offset your ordinary income. Any additional losses beyond the $3,000 annual limit may be carried forward for use in future years.

When using this strategy, be aware of the IRS “wash-sale” rules which prevent you from deducting losses on the sale of a security if you buy back the same security within a 60-day period—30 days before the sale and 30 days after the sale.

Required minimum distributions

If you are over 70½ and have IRAs or other retirement accounts, don’t forget to take your required minimum distribution (RMD) before the end of the year. The RMD is a taxable distribution that must be taken each year. If the RMD is not taken correctly it could result in a penalty of up to 50 percent. One option to save on taxes is to donate all or a portion of your RMD to charity. This is called a Qualified Charitable Distribution (QCD). A QCD counts toward your annual RMD and is excluded from your taxable income so long as it does not exceed the annual $100,000 limit.

Flexible spending accounts

Don’t forget the funds you set aside in your flexible spending account for 2019. These funds are used for expenses related to the special purpose of the fund. The accounts may pay for eligible medical, dental, vision and/or dependent care costs. Verify the rules under your plan to determine if you may rollover unused funds into 2020. If your balance exceeds the permissible rollover amount, plan to spend the balance on qualified expenses before the end of the year.

Defer income and accelerate expenses

Income you receive in 2019 is considered taxable in 2019. If your employer allows you to defer your year-end bonus, consider deferring some income from 2019 to 2020. The delay of the sale of capital gain property and receipt of distributions into 2020 can also help reduce this year’s taxable income. Deferring into the next tax year only makes sense if you expect to be in the same or lower tax bracket for next year.

Since the Tax Cuts and Jobs Act of 2017 nearly doubles the standard deduction, fewer taxpayers itemize their deductions—a game changer for many who previously itemized deductions. For some taxpayers, it may make sense to strategically accelerate and pre-pay certain tax-deductible expenses—bunching into a single year what they had planned to pay over two years and benefit from itemized deductions this year and not next year. Boosting their total itemized deductions beyond the standard deduction will also allow them to deduct part of the medical and dental expenses they have paid. Consider pre-paying qualified medical expenses—the threshold for qualified medical expenses for 2019 is 10 percent of your Adjusted Gross Income (AGI).

Gifts and donations

During the holiday season, it seems timely to make gifts to support your favorite charitable organization and realize deductions, and/or give to loved ones and maximize your annual gift exclusions.

The most common type of charitable contributions are direct cash gifts; however, gifting appreciated stock to your favorite charity may provide additional tax benefits. Not only will you be able to take an income tax deduction for the fair market value of the stock, you will also remove this stock’s accumulated capital gains from your portfolio. Another option is the QCD strategy mentioned above for taxpayers over 70½. An advantage of the QCD strategy over the other options is it directly reduces taxable income rather than being subject to the standard deduction.

Because of the increased standard deduction, many charitable givers may no longer receive a tax benefit from their normal charitable giving. Although this is technically related to bunching your itemized deductions, charitable giving may be one of the easiest ways to reduce your taxable income by pulling future years’ charitable giving into the current tax year. Donor advised funds (DAFs) are a handy tool for charitably-inclined, tax-savvy individuals. Consider making an irrevocable donation, equal to several years’ worth of charitable gifts, to a donor advised fund before the end of the year. You can deduct the entire donation in the current tax year and control the disbursements to the charities of your choice over multiple years.

For estate planning purposes, in 2019, the IRS allows you to make tax-free gifts of up to $15,000 per year ($30,000 for married couples) to as many individuals as you’d like. These gifts will not be subject to federal gift taxes and will not be considered taxable income for the recipient. Apart from making direct cash gifts, consider contributing these tax-free gifts to a 529 plan for your children/grandchildren. Contributions to a 529 plan grow tax-deferred and withdrawals used for eligible educational expenses are tax-free.

Additionally, a special provision of 529 plans allows you to front-load the plan using an accelerated gifting schedule by contributing a lump sum of $75,000 ($145,000 if married filing jointly) in the first year of a five-year period without creating a taxable gift. This clearly amplifies the wealth transfer potential and is worthy of careful consideration. For example, a married couple with four grandchildren could reduce their taxable estate up to $600,000 by contributing to four separate 529 plan accounts without consuming part of their lifetime gift exemption.

Roth conversions

If you’ve thought about taking advantage of the market’s volatility to convert part or all of your Traditional IRA or retirement plan assets, enough of the year has passed that you should be able to project the potential tax impact. People find Roth Conversions helpful for two reasons: First, there may be future tax benefits to doing a conversion now if you expect your future income to be taxed at a higher rate, such as avoiding the ‘”tax torpedo“— a sharp rise in a taxpayer’s marginal tax rate caused by the taxation of Social Security benefits and required minimum distributions from IRAs at age 70½ — or to mitigate the effect of Medicare premium surcharges on high-income retirees. Other factors to consider include your current and anticipated future income tax rates, when you begin to withdraw and your time horizon. Second, as an estate planning consideration, it may make more sense to leave your Roth IRA assets to your heirs and traditional IRA assets to charities. As each person’s income tax experience can vary significantly, it is best to consult with your professional advisors to understand your options and carefully consider the consequences before you decide to convert part or all of your Traditional IRA or retirement plan assets.

Review spending and set goals for 2020

This is a good time of year to review your spending from 2019 and set priorities going forward. There are many good resources for this such as Quicken or other online trackers. Identify any large expenses planned for next year and make sure there is a source to fund them. If you received a raise or year-end bonus, consider how much of that you would like to save and invest.

Financial checklist

In addition to the year-end strategies above, consider making and reviewing an annual financial checklist. As a starting point, you can find our sample checklist here. This is particularly important if you or your family have experienced any major life events this year, such as marriage or divorce, births or deaths, or a job change—or have major life events on the horizon. These uncomplicated tasks can prevent serious consequences if otherwise overlooked.




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