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Top 10 End-of-Year Financial Planning Considerations

As the end of the year approaches time gets away from us and we put things off until next year, however some financial decisions expire at the end of the year. Here are 10 end-of-year financial planning considerations

You can download the End-of-Year Financial Planning Checklist here: End-Of-Year Financial Planning Checklist.pdf

  1. Do you have unrealized investment losses in your taxable accounts? What does that even mean? Do you have a brokerage account (not a retirement account like an IRA, Roth IRA, 401(k) or 403(b)), and if so, have any of the assets in that account lost value since you purchased them? An unrealized investment loss is when you own something that is now worth less that what you originally bought it for. If you purchased ABC stock for $100 and it is now worth $75, that is an unrealized investment loss. If you bought XYZ for $100 last year, then it went up to $120 at the beginning of this year, and is now down to $110, that is not an unrealized loss.
    1. If you answered ‘yes,’ you might consider selling the asset (realize the loss) and then use the loss to offset the gains from selling an asset that increased in value.
    2. You can also use up to $3,000 in losses as a write off against ordinary income.
    3. Be sure to consult a Certified Financial Planner® professional before making this decision as there are specific rules governing capital gains and losses.
  2. Are you 72 years of age or older, or do you have an inherited IRA? You will likely need to take a Required Minimum Distribution (RMD) for 2021. Last year, 2020, the federal government waived RMDs, but they have not done so for 2021. RMDs are the amount the IRS requires you to distribute from tax-deferred retirement accounts like traditional IRAs and 401(k)s every year after age 72. The IRS forces you to distribute assets from these accounts in order to tax the distributions, otherwise the accounts could shelter assets from taxation indefinitely.
    1. If you have multiple IRAs, the RMDs can generally be aggregated, but inherited IRAs cannot be aggregated with traditional IRAs.
    2. Employer retirement plans, like a 401(k), must be calculated and taken separately.
    3. 403(b) plans are an exception, and you can aggregate RMDs from multiple 403(b)s.
  3. Do you expect a change in your future income?
    1. If you expect your future income to increase, consider opportunities to limit your future tax liability. You could contribute to a Roth IRA or Roth 401(k). If you already have assets in a traditional IRA or 401(k), there are strategies for converting some or all of those assets to a Roth IRA. This requires proper planning, but I have helped clients put Roth conversion plans in place that have the potential to save them millions of dollars across their retirement. You can also consider making after-tax 401(k) contributions if your employer’s plan allows. If you are over age 59.5, it may be beneficial to accelerate traditional IRA withdrawals to fill up lower tax brackets.
    2. If you expect your future income to decrease, look at strategies to minimize your tax liability right now. This includes contribution to traditional IRA or 401(k), since those contributions are pre-tax and lower your taxable income this year.
  4. Are you on the threshold of a tax bracket? Look for ways to defer income or accelerate deductions and manage capital gains and losses to stay in the lower bracket. There are a couple significant thresholds to be aware of and you can find the current tax brackets here.
    1. For married couples filing joint returns (MFJ), the big jumps in tax bracket occur at $81,050 where the tax rate jumps from 12% to 22%, and at $329, 850 where the tax rate jumps from 24% to 32%.
    2. For taxable income above $445,850 ($501,600 if MFJ) long-term capital gains will be taxed at the maximum rate of 20%.
    3. The Net Investment Income Tax of 3.8% kicks in if your Modified Adjusted Gros Income (MAGI) is over $200,000 ($250,000 for MFJ).
  5. Do you plan to give large financial gifts?
    1. For donations to charities there are a few considerations to keep in mind. Taxpayers who are claiming the standard deduction can still claim a $300 deduction for cash contributions to qualifying charities in 2021. Instead of cash, consider donating appreciated securities or making a Qualified Charitable Distribution from a retirement account. Consider bunching your charitable contributions to maximize the tax benefit. Give several years’ worth of contributions one year, file taxes using itemized deductions that year, and then use the standard deduction in the years between lump donations.
    2. Gifts up to the annual exclusion amount of $15,000 are gift tax-free. That exclusion is per year, per recipient. That means if John and Kate can each give their three children $15,000 without incurring a gift tax, so each child could receive a total of $30,000 combined from their parents. You can still give more than $15,000 if you wish, but any amount over the limit may be subject to the gift tax.
    3. Now you may not be looking to just give your children large sums of cash, instead this exclusion is often used to fund 529 accounts to save for college. You also have the option to make a lump sum contribution up to $75,000 to a beneficiary’s 529 account and then treat it as if it were spread evenly over a 5-year period.
  6. Do you expect a significant financial windfall, like an inheritance, RSUs vesting, stock options or bonus? Speak with a CPA and review your tax withholdings to see if you need to make estimated tax payments.
  7. Do you own a business?
    1. For pass-through businesses, consider Qualified Business Income Deduction eligibility rules.
    2. Look at the trade-offs between Roth and traditional retirement plans and how that might impact taxable income and QBI
    3. Does it make sense to accelerate or defer business expenses to reduce overall tax liability
  8. Can you increase your savings? Check with your employer’s HR rep.
    1. If you have an HSA, you can contribute up to $3,600 ($7,200 for a family) and an additional $1,000 if you are over age 55.
    2. If you have an employer retirement plan, check to see if you are contributing the maximum amount. Also check for an employer match. You want to at least be contributing to the maximum amount of the max or you may be leaving money on the table.
    3. The maximum salary deferral contribution to an employer plan is $19,500. If you are over age 50 you can contribute an additional $6,500 catch-up amount.
  9. Are you taking full advantage of annual healthcare benefits? If possible, make sure to leverage your FSA and annual health insurance deductible.
    1. Some companies allow up to $550 unused FSA funds to roll over to the next year
    2. Check the deadlines for submitting receipts as well as the deadline for unused funds in any Dependent Care FSA.
    3. If you met your health insurance plan’s annual deductible and have additional care needs, consider incurring the additional medical expenses before the end of the year, before the deductible resets.
  10. Has your marital status changed this year? Your tax liability will be impacted based on your marital status on December 31.

If any of these topics applies to your situation, I recommend discussing them with a Certified Financial Planner® professional. If you're ready to get started on your financial plan, contact On Point Financial Planning.