We are approaching the end of 2020, and we are about to turn the page on a most challenging year. If there is one thing that a global pandemic can teach us, there is value in being prepared. We do not have a crystal ball or genie to tell us what the coming year brings, but we can do our best to prepare ourselves. Please take a moment to look through our 2020 year-end financial checklist with several essential tasks to end the year strong and prepare yourself for a successful 2021.
Tax Planning Considerations
Now is the time to ask yourself if you anticipate an income increase or decrease in the coming year. Suppose you expect an increase in income and want to minimize your tax liability. In that case, you may consider making a ROTH IRA and ROTH 401 (k) conversions or making an after-tax 401 (k) contribution. Also, if you are age 59.5 or over, you may consider filling lower tax brackets by accelerating traditional IRA withdrawals.
If you think you may be seeing a decrease in income next year, you may want to think about strategies to minimize your current tax liability now, such as making traditional IRA and 401 (k) contributions rather than contributions to ROTH accounts.
Another tax issue to consider is whether you have carryforward losses from previous years or capital losses for the current year. If so, there may be an opportunity for tax-loss harvesting. Also, it could be possible to take the loss or utilize the carryforward to bring down your ordinary income by as much as $3,000.
An issue that directly affects tax planning is whether you are riding a tax bracket threshold. If so, it would be wise to consider strategies to accelerate deductions or defer income and manage capital losses or gains to keep you in an advantageous bracket. Hence, it’s a good idea to keep essential tax thresholds in mind.
- Suppose your taxable income is below $163,300 (or $326,600 if married filing jointly); you are in the 24% marginal tax bracket. Taxable income that falls above this bracket will be taxed at a 32% rate.
- If your taxable income comes in above $441,450 (or $496,600 MFJ), any capital gains you have will be taxed at the higher 20% rate.
- If you have a MAGI (Modified Adjusted Grodd Income) over $200,000 (or $250,000 MFJ), you may get hit by the 3.8% Net Investment Income Tax on the excess over $200,000 ($250,000 MFJ) or on the lesser of net investment income.
- If you are currently on Medicare, keep in mind any IRMAA surcharges. IRMAA stands for Income-Related Monthly Adjustment Amount.
Also, for end-of-year tax considerations, charitable giving can be a desirable tool in that individuals can support a cause they feel passionate about while offsetting their tax burden. Suppose you plan to take the standard deduction ($12,400 single filer, $24,800 MFJ). In that case, you may think about bunching your contributions to charity or making a contribution to a donor-advised fund every few years, which could allow for itemizing in certain years. Also, in 2020, the CARES Act produced a $300 above-the-line deduction for donations made to charities that qualify. This would mean a reduction in AGI for taxpayers claiming the standard deduction.
Cash Flow Considerations
If you feel you can put away some extra money and are age 55 or over and have a health savings account (HSA), you may be able to contribute $3,550 ($7,100 per family). Also, if you have a retirement plan through your employer, such as a 401(k), you may be able to contribute more, but you would need to check with your plan provider as to when the rules are for making changes. Employer plans have a maximum deferral contribution limit of $19,500, with a catch-up contribution limit of $6,500 if you are aged 50 or over.
If you are thinking about contributing to a 529 account, you can utilize your annual exclusion amount to put in up to $15,000 a year to a beneficiary’s account free of gift tax. Another option is to make one more sizeable large contribution of up to $75,000 to a 529 account for a beneficiary and designate it as a contribution made evenly over a 5-year term gift-tax free.
Insurance Planning Considerations
If your Flexible Spending Account (FSA) has a balance at the end of the year, you may check with your employer regarding your options. Some companies will let you roll over up to $550 of unused money to the following year. Also, some employers will allow you until March 15th of the next year to spend unused funds from your FSA. Next, check the deadlines for leftover funds as it applies to a Dependent Care FSA if you have one.
Estate Planning Issues
If you have any changes to your family or have bought or sold any assets this year, it would be prudent to review your estate plan before year-end. Significant life changes do happen, and it’s essential to account for them. Items to attend to may include updating your will, durable power of attorney, and guardianship designee if applicable. If you plan to give any gifts before the end of the year, keep in mind the annual exclusion amount of $15,000 per donee per year is gift-tax free.
Asset Planning and Debt Considerations
If you have taxable accounts with investments subject to capital gain taxes, speak with your financial advisor or CPA about tax strategies to minimize your liability. Also, if you have any unrealized investment losses, think about realizing losses to offset gains or write off $3,000 against ordinary income.
Taking care of significant financial moves before the end of the year doesn’t have to be stressful. Our goal is that this 2020 year-end financial checklist can get you started. You can ensure you are in the best position possible for 2021 by looking at each layer of your plan with your fiduciary financial advisor and making any necessary adjustments.
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