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Our 2020 Year-End Financial Planning Checklist Thumbnail

Our 2020 Year-End Financial Planning Checklist

Year-end financial planning has an extra twist in 2020.  Next year, the incoming Biden administration may push for tax increases on businesses and high-income households—though their ability to do so may be dependent on whether the Democrats win two Georgia run-off elections in January for Senate seats. 

Further, it’s tough to predict how campaign plans and policies turn into actual tax legislation.  And the effective dates of potential tax law changes are also unknown—meaning that legislation passed next year may be retroactive to the beginning of the year—or not.

So, making year-end financial planning moves based on potential tax law changes is difficult.  However, there are still many items to consider that are not dependent on changes in tax law.   Here is our year-end checklist to get started. (Please consult with your tax, legal and financial advisor for specific information regarding your situation.)

Retirement Accounts

  • Contributions to 401(k) accounts need to be made prior to year-end.  (You can make IRA contributions for 2020 up until April 15th, 2021.) The maximum salary deferral for 2020 is $19,500. If you are over 50, you can make an additional "catch-up" contribution of $6,500.
  • Under the CARES Act, passed in March of this year, required minimum distributions from IRAs (including inherited IRAs) are waived for 2020. While it may be advantageous to skip this year's distribution, it still may make sense to take some or all of your distribution to "fill up" a relatively low tax bracket. If your taxable income is less than $163,300 ($326,600 if married filing jointly), your marginal tax bracket is 24%. The next dollar of income is taxed at a higher rate, 32%.
  • If you expect your tax rates to be higher in the future, consider a Roth Conversion. But remember, pay the taxes on the conversion from funds outside of your retirement accounts.
  • Some retirement plans such as an Individual 401(k) need to be opened before December 31st.

Taxable Investment Accounts

  • Do you have any unrealized investment losses? Consider realizing the losses prior to year-end, to either offset gains taken this year or to carry forward against future capital gains. You can also use capital losses to offset $3,000 of ordinary income. 
  • Thinking about realizing gains prior to year-end? If you have held the asset for less than a year, you'll pay the same rate on the gains as you pay on your ordinary income. If the asset has been held for more than a year, gains are subject to long-term capital gains tax rates. For 2020, long-term capital gains are taxed at 15% if your income is between $40,001 and $441,450 ($80,001 to $496,600 if married filing jointly). If your income is above these thresholds, the rate is 20%.  Don't forget, there may be state taxes, and additional net investment income taxes from the Affordable Care Act.

Charitable Contributions

  • Consider "bunching" several years of charitable contributions this year if it allows you to itemize your deductions, instead of taking a lesser standard deduction ($12,400 if single, $24,800 if married filing jointly). Contributing to a donor advised fund is a great way to take advantage of this strategy.
  • Contributions of appreciated stock (either directly to a non-profit, or to a donor advised fund) are an effective way to give, while removing future capital gains tax liability.
  • IRA account holders aged 70½ or older who make a contribution directly from a traditional IRA to a qualified charity can donate up to $100,000 without it being considered a taxable distribution. The deduction effectively lowers the donor's adjusted gross income. In this case, the donation cannot be made to a donor advised fund, and the donor cannot also claim the donation as a deduction on Schedule A of their tax return.

Gifting & 529 Account Contributions

  • For 2020, you can gift $15,000 ($30,000 for married couples) to any individual without having to file a gift tax return. If you are contributing to a 529 college savings account, you can make a lump sum contribution of up to $75,000 and elect to treat the contribution as if it was made evenly over 5 years ($150,000 for married couples filing jointly).
  • Don't forget to tell your CPA about the 529 contribution, as there may be a state tax deduction available. 

Workplace Benefits and Health Insurance

  • If you have a balance remaining in your Flexible Spending Account (FSA), consider using the balance prior to year-end.  Some plans allow for up to $550 of unused FSA funds to be carried into the following year, or there may be a grace period of up until March 15th to spend the funds.
  • If you have met your health insurance plan's annual deductible, consider incurring additional medical expenses prior to the end of the year. 

The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only.  Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.