Disclaimer: The following list is not meant to be comprehensive. It is also not meant as advice. Many listed ideas may not even apply to you! Points listed are ideas only and should not be acted upon without understanding your specific situation or only after you’ve consulted a professional.
11 Year End Planning Items to Consider
Working from home and parenting means I clean up piles of toys every day. Sometimes, that means many times per day. If I’m home with kids by myself, I need a plan or the house, work, and just about everything will descend into chaos. A Huge mess!
Take the Monday after Thanksgiving for instance. We decided to keep the kids home from daycare to avoid possible COVID-19 exposure due to family gatherings over the holiday. My wife still went to work. So, I made a deal with the two boys: they can make whatever mess they want as long as it’s only in the basement.
The result was a mountainous pile of rubble. If it wasn’t bolted down it ended up in a massive heap in the middle of the room. Sure, they reigned over their mountain of trash—with more pride than I’ve ever seen before—but dad had to clean it up.
In a year that was anything but normal, there is still time to do some year-end organizing. Even within a month, there is still time to address asset, tax, estate, insurance, and cash flow issues. Think of it as tidying up your financial mountains of rubble.
So how do we stay organized? Consider using the following 2020 Yearend Financial Planning checklist (not comprehensive by any means) to tidy up portfolios, personal financials, and other money items before 2020 ends on December 31.
Cash Flow Planning Items
- Are you able to save more? If so, consider adding to tax-advantaged accounts. You can contribute up to $3,550 ($7,100 for a family) to your health savings account (“HSA”) if you were part of a qualifying high deductible health plan in 2020. For those over ages 55 or older, you can add an extra $1,000.
- Consider increasing contribution amounts to employer retirement plans such as a 401(k). The maximum salary deferral is $19,500 plus a catch up of $6,500 if over the age of 50. Check with your plan sponsor to see how you can increase deposits before the end of year.
- If you were age 70.5 prior to 12/31/2019, required minimum distributions from individual retirement accounts were waived for 2020 under the CARES Act. However, you may still consider taking some distribution if you are going to be in a low bracket this year. When it comes to low tax brackets, use them or lose them.
Estate and Gift Planning Items
- Are there any gifts still to be made this year? Any individual can gift another individual up to $15,000 tax-free with no tax filing requirements. This is known as your annual gift exclusion. Taxes, exclusions, and limits may be changing in the next few years, and 2020 may be a good year to shift funds to other family members if you want and can afford it.
- Additionally, you can use your gift exclusions to contribute to a 529 account for your kids or grandkids. A 529 is a tax advantage college savings account. To make an even larger deposit, you can make a lump sum contribution of up to $75,000 per account per person, and treat it as if your annual exclusion were made evenly over a five-year period. What kid wouldn’t love that as a stocking stuffer?
- Check beneficiary designations on IRA accounts. With the SECURE Act, passed in 2019, most non-spouse inheritors must withdraw funds within 10 years. Clients affected by this change may want to consider more efficient wealth transfer strategies this year. Contact us.
Tax Planning Items
- Do you expect your income to increase in the future? You can take steps in 2020 to minimize future taxes. With required minimum distributions waived for 2020, now might be a good time to convert IRA assets to a Roth IRA. You’ll owe taxes this year on the conversion. Going forward, however, converting may lower future required minimum distributions and tax liabilities. We wrote about the strategy here: Roth IRA Conversions.
- There may be tax-loss harvesting opportunities. If you have capital losses this year or any carryforwards from prior years, consider using them to rebalance and offset gains in brokerage accounts. With the fast drop and rebound, accounts that were opportunistically rebalanced in March are slim on losses. Let us know if we can help coordinate gains and losses across your accounts. Lastly, if you have losses, you may be able to take the loss or use the carryforward to reduce your ordinary income up to $3,000 this year.
- Review – or ask us to review – expected capital gain distributions from your mutual fund holdings. Most funds close their books on October 31 and make capital gain distributions in November and December. From time-to-time, gains can be large. In a year where growth stocks seemed to only go one direction, up, some funds may deliver you an unwanted holiday surprise.
Charitable Planning Items
- Are you charitably inclined and want to reduce your taxes? For 2020, the CARES Act created a $300 above-the-line deduction for contributions to certain qualifying charities. This is available for all taxpayers, even ones that don’t itemize. For example, food availability has been hard on many people and families this year, consider helping out a local food bank or others in need. Now is a great year to provide help and receive a deduction. (reference)
- Tax and other laws may be changing in the coming years. For those with a large estate that may be taxable in the future, and are looking for ways to reduce those taxes, consider bunching charitable contributions this year. Another strategy is to bunch contributions by opening and funding a donor advised fund. If you take the standard deduction and are looking for ways to reduce taxable income, bunching charitable donations may work for you.
How to plan
Start by collecting your statements, reviewing your goals, and asking for a tax projection from your accountant. Track what happened over the last year and see how you want the next year to go. Then work through each item and consider how doing that item may help you stay in control of your finances and help you make sure your money does what you want. When in doubt, call for help. Or, use this link to book time on my calendar.
While spring may be a great time for cleaning out the garage, yearend is a great time to review your finances and money position and plan for the coming year. With a wild year almost past, and an uncertain 2021 awaiting us, we can tidy up our financial plans now before we have to start over on January 1st.
Here’s to not letting our financial plans get as messy as my basement!