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Your Financial Year-End To-Do List

November 23, 2020 Author: Tess Downing, MBA, CFP®, Complete View Financial

Complete View Financial San Antonio Texas

2020 has been a year like no other. We’ve had a pandemic, shutdowns, job losses, shuttered businesses, new ways to work and shop, growing national divisiveness and political discord. The year has also brought us opportunities, as chaos and volatility often do.

We’ve had lots of distractions and uncertainty – compounded by concerns about the economy, the presidential election and the virus.

So, what better tool could we have than a year-end financial checklist to be sure we’re not leaving any money on the table when it comes to taxes and benefits?

Ten Actions You Can Take Before the End of the Year

December 31 is the deadline for many of the actions you can take to protect your money. And, since some of them can take some time, this is the time to review what options work for you.

1. Put Your Money to Work

If you have cash available after meeting all your obligations for the year, here are several ways to put it to work for you to either lower costs or prepare for the future:

Fully fund an emergency fund if you haven’t already.

Pay down student debt or a high-interest loan.

Refinance your mortgage to benefit from rock-bottom mortgage rates.

2. Review Your Benefit Elections

Several benefits have open enrollment periods at the end of the year. Others are determined by when your employer allows adjustments. Here are some to think about:

Run the numbers on your health insurance coverage if premiums are increasing dramatically. Are you getting all the subsidies you’re eligible for? If you have a high-deductible plan with a health savings account (HSA), is that working for you? (HSAs offer tax-deductible contributions, tax-deferred growth and tax-free withdrawals. Best of all, you are under no time limit to use them, and they can be handy in retirement.)

If you have a voluntary term life insurance policy through your job, check to see if a private annual renewable term policy wouldn’t cost less. Just don’t cancel one before starting another.

If you have a balance in your Flexible Spending Account (FSA), verify your plan’s rules for rollovers of unused funds. (They are usually use-it-or-lose-it.) Pre-tax contributions can save hundreds, depending on your tax rate.

3. Review Your Retirement Account Contributions

If you are an employee, tax deductions and employer matching contributions are like free money for your future retirement. Contributions to 401(k)s, 403(b)s, 457s or federal thrift savings plans must be made by December 31.

And be sure to update your contribution strategy for next year to at least reach your company’s threshold for matching contributions. Review how your funds are being invested and any hidden fees that are siphoning off gains.

If you have individual retirement accounts, whether IRAs or HSAs, you have until April 15, 2021, to fund your account for 2020, but you should start planning for that funding. Are your children earning income? Consider helping them fund tax-favored accounts, too.

Thanks to the SECURE Act signed at the end of 2019, you no longer have an age limit to contribute to a traditional IRA, as long as you have earned income.

4. Convert Eligible IRAs to Roth IRAs if Beneficial

If you’ve been thinking of converting traditional IRAs or pre-tax 401(k) funds to Roth IRAs, remember that Roth conversions generate immediate taxation on the funds being converted. But this may be a good year to do a conversion because federal tax rates are low – and most especially if the November election results mean that tax rates go up in 2021.

All conversions must be completed by December 31 to qualify for 2020. Conversions can no longer be reversed as in the past, so consider the move carefully. Involving a tax planner or financial planner may be wise to make the most of any opportunity to lower retirement tax burdens.

5. Evaluate Your Tax Losses

Selling money-losing stock positions in a portfolio can offset taxable capital gains and possibly even reduce ordinary income by up to $3,000 this year. (And remaining losses can be carried forward as a deduction in future years.) But the strategy can affect your targeted asset allocations. You may need to rebalance your portfolio to bring it back in line with your goals, objectives, and risk tolerance. Also, watch out for the 30-day wash rule if the same (or substantially identical) security is bought within 30 days after selling it at a loss. That could disqualify the offset. And pay attention to actively managed mutual funds in a taxable account. Dividend and capital gains distributions at year end will be reportable to you for tax purposes.

6. Review Your Required Minimum Distributions (RMDs) if They Apply to You

Typically, anyone over age 72 – or who holds inherited IRA accounts – has to withdraw RMDs from their retirement accounts by December 31 each year, based on a formula provided by the IRS. (RMDs are how the IRS finally captures the taxes on your earlier tax-advantaged earnings.) If requirements are not met, the penalties are high.

Luckily, for 2020 the RMD requirement was waived by the CARES Act. But you might want to take advantage of the low 2020 tax brackets and withdraw funds anyway; any part of a bracket not used will be lost forever.

7. Consider Setting Up Qualified Charitable Distributions (QCDs)

A charitable donation as a direct transfer from your IRA custodian to a qualified charity is called a QCD. Although no RMDs are required in 2020, such a donation would have counted as part of your RMD requirement for the year, and the amount donated would have been excluded from taxable income.

QCDs can still be made despite the waiver. Even though the RMD starting age has been raised to 72, IRA owners over age 70½ can still transfer up to $100,000 to a charity directly from their IRA in 2020. QCDs also reduce the impact of your annual income on premiums and fees related to Medicare and Social Security. And by lowering your IRA balance, a QCD may also reduce the RMD amounts for future years. Just be sure the charity receives the QCD by December 31.

8. Explore Other Charitable Giving

The new higher standard deduction ($12,400 for individuals and $24,800 for married couples in 2020, slightly higher if you are age 65 or over) has made it harder to deduct charitable giving. Prepaying or bunching several years of qualified giving into one year may be the solution. Gifting appreciated stock is another great way to give to charities.

Contributing to a donor-advised fund is one more option, especially at a hectic year end if you itemize and are unsure where you want to contribute. Major fund companies, communities, universities and individual charities offer these funds. Minimum investment requirements can vary, and you should check the rules and fees before deciding on a fund. The account grows tax-free, and you can send the money to a qualified charity at a later date.

9. Review Gift and Estate Tax Exemption

The current gift and estate tax exemptions may be changing in 2021, despite initially being scheduled to last until December 31, 2025.

The gift tax annual exclusion in 2020 lets you give up to $15,000 of qualifying gifts per recipient without using any portion of your federal estate and gift tax exemption. “Gift splitting” lets married couples double their allowed gift tax exclusion amount. By splitting the value of a gift between them, a couple could transfer up to $30,000 per individual, for example.

Other annual exclusions include direct payments to educational institutions, medical providers (including health insurance premiums) and Section 529 plans. However, IRS regulations must be carefully followed.

The total lifetime federal and gift tax exemption amount is $11.58 million per individual ($23.16 million per married couple) in 2020. The exemptions were scheduled to decrease to about half by 2026 but are at risk of being reduced much earlier – possibly in early 2021. One strategy is to make large gifts before the end of the year in case the exemption is drastically reduced soon.

10. Use the End of the Year as a Time to Review

While only some of the following items have year-end deadlines, take advantage of your focus on finance to perform valuable reviews on:

Medicare plans, Medicare Part D (prescription drug) plans and health care plans. All have open enrollment periods in the last quarter of the year.

Beneficiary designations on retirement plans (including IRAs), life insurance and deferred compensation plans. Ideally, they should align with the beneficiary designations in the will.

Fiduciary designations, such as guardians of your minor children, executors, or proposed trustees or trust protectors.

Credit reports! If you have not requested your credit reports during the year, be sure to do so at year end. You need to monitor them for incorrect entries, as well as actively improve your credit scores.

In Closing

No list can be exhaustive, and these are just some of the actions you could consider. Your financial picture is unique, so financial decisions should be made with full information – and ideally with expert advice tailored to your situation.

Use the year end to review your financial plan. And if you do not have one, the uncertainty of these times makes this the right moment to put one together. Contact Complete View Financial for an initial consultation if we can help.