The holiday season is a time for good cheer, greeting family and friends, celebrating the present (and presents), and reflecting on the year just ending. (Though, given how tumultuous 2020 has been and the likelihood the effects of the global pandemic will extend into 2021, you may want to keep those reflections brief and go right to New Year’s resolutions.)
When considering those resolutions for next year, it is a good time to look at another important list: our year-end planning checklist. Take some time between the eggnog and champagne to go over these items.
- Financial goals. Did you meet your financial goals for 2020? Do these goals need to be changed or updated? Review your investments to help ensure you are meeting your financial goals both short- and long-term goals.
- Year-end review. Did you have any life changes during the year that need to be addressed? This would include selling, transferring, and/or purchasing a major financial asset; a change in marital status; an addition to your family; or receiving a gift or inheritance.
- Market meltdown. Are you adequately prepared for another one? If not, what steps should you be taking now?
- Tax gain/loss harvesting. A potential change in capital-gains tax rates in 2021 make buy-and-hold strategies more attractive. The higher the tax rate, the more valuable the strategy. Similarly, it becomes more important to harvest tax losses to shelter gains that would otherwise be taxed at the higher rate. Remember, the IRS only allows $3,000 of losses per year. Consult with your accountant on how to structure tax losses to offset gains for the year.
- Required Minimum Distributions. The CARES Act waived required minimum distribution (RMD) for the year 2020. However, it is advisable to look at taking voluntary IRA distributions anyway. That is because taking money out of these tax-deferred vehicles in 2020 might be able to be done at lower tax rates. Also, the SECURE Act changes the age for required minimum distributions from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for individuals who were born on July 1, 1949, or later is due by April 1 of the year after the year in which they turn 72. If you inherited any type of retirement account, check if you need to take an RMD. If so, check to be sure whose life is it based on: yours or the decedents?
- Max out your 401(k)/IRA contributions, including any catch-up contributions. You have until April 15, 2021, to fund your IRA for 2020. Previously, individuals were not able to contribute to their traditional IRAs in or after the year in which they turn 70½. However, the SECURE Act eliminates this age cap. If you have an employer-sponsored retirement account, you should review where your money is invested and make changes to this account. Consult your investment advisor/tax accountant for any help. If you left a job and your 401(k) behind, take the time to consolidate accounts. For 2020, you can contribute $6,000 to a traditional IRA, plus a $1,000 catchup contribution if you are 50 or older. For a 401(k), you can contribute up to $19,500, plus a $6,500 catch-up contribution if you are 50 or older. For 2021, those limits are projected to remain the same. For more on 401(k) see our Bowen Report: https://bowenasset.com/whats-in-your-401k/
- Inherited plan benefits. The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the plan participant) are not subject to this rule. Conduit trusts and see-through accumulation trusts are required to use the 10-year payout rule unless the trust is for the sole benefit of a disabled or chronically ill beneficiary. Non-see-through accumulation trusts will continue to use the five-year payout period, which was required before the SECURE Act. For more on the SECURE Act see Bowen Reports: https://bowenasset.com/the-secure-act-changes-in-your-retirement/
- Year-end income planning. Examine any remaining income that can be deferred from one taxable year to the following year. Oftentimes, year-end bonuses and discretionary investment income can be shifted one year to the next. On the flip side, prepaying property taxes, medical bills, or estimated state taxes, if you are able, can give you added deductions to further reduce your taxable income.
- Cybersecurity. By following a few guidelines, you can make your information less attractive to potential thieves. One of those guidelines is to change your passwords, at a minimum, once a year. Foe more on this and advice on using a password manager, see our recent report on cybersecurity. https://bowenasset.com/category/cybersecurity/
- Finding an accountant. If you need an accountant or are thinking of changing accountants, now is the time to search for a new one. When choosing an accountant, consider these questions: What degrees or licenses does the accountant have? How many years has the accountant been in the business? What fees will be charged? Is the accountant’s expertise relevant to you? Who will prepare your return? Will the accountant represent you if you are audited? https://bowenasset.com/these-taxing-times-are-a-good-time-to-select-a-tax-pro/
- Research charitable contributions. If you are considering making any year-end charitable contributions, you may want to do the research now. Just as with investing in a for-profit firm’s stocks, it’s still important to ensure that the money you put into a charity will have a good return on your investment (i.e., making sure the money you give will be efficiently put to good use) so your donated resources are not squandered. Check out our Bowen Reports on charitable giving. https://bowenasset.com/doing-good-can-go-bad-how-to-be-effective-in-your-charitable-giving/
New tax incentives for charitable giving in 2020 came in March with passage of the CARES Act. The law gives donors who plan to take the standard deduction the option to claim an above-the-line deduction of up to $300 for cash contributions to operating charities. The CARES Act also suspends the AGI 60% limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions must be in cash and contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation.
For those who itemize deductions, appreciated non-cash assets, such as stocks, ETFs, and mutual funds held more than one year, may offer an additional tax benefit in comparison to cash donations. Beyond claiming a deduction for the fair market value of an asset, donors can potentially eliminate the capital gains tax they would incur if they sold the asset and donated the cash proceeds.
Whether itemizing or claiming the standard deduction, individuals age 70½ and older can direct up to $100,000 per year tax-free from their (IRAs) to operating charities through qualified charitable contributions (QCD). By reducing the IRA balance, a QCD may also reduce the donor’s taxable income in future years, lower the donor’s taxable estate, and limit the IRA beneficiaries’ tax liability.
- Cash gifts and taxes. If you can afford to be generous, in 2020 you can give up to $15,000 each to any number of individuals with no gift tax or reporting requirements. Also, there is no tax for the recipient. Unused portions can’t be carried over to the next year. Individuals can make unlimited gifts on behalf of others by paying their tuition costs directly to the school or their medical expenses directly to the health care provider.
- Help for your helpers. In an emergency or the event of incapacity, could those who need to know—adult children, caretakers, or others given power of attorney—quickly find the documents and information such as bank account numbers, house deeds, wills, and tax returns that they need in order to continue taking care of business? https://bowenasset.com/when-life-goes-sideways-be-prepared-to-help-your-helpers/
- Check on all beneficiaries on life insurance policies and retirement accounts to make sure these are accurate. These types of investment accounts pass to the beneficiary when the owner dies, despite what the will may state.
- Check on flexible spending accounts. If you have any type of flexible spending accounts, check to see how much money is left in them to make sure it is used it up before the year’s end.
- Look into 529 accounts. A grandparent-owned 529 account, which is free of federal income taxes until the money is withdrawn, is not reported on the Federal Student Aid (FASFA) form. Thus, it does not affect the grandchild’s financial-aid eligibility. However, once it is distributed, it is considered the grandchild’s income and may affect how much the grandchild will receive. Grandparents can also open Roth IRAs for their grandchildren. They can contribute up to 100% of the grandchild’s earned income into the account up to a maximum of $6000. Check with your account and financial advisor for the best way to set these up. For more on this, look at our Bowen Reports:https://bowenasset.com/college-credit-529-and-coverdell-educational-accounts/
- Review financial and investment documents. It is easy to get into the habit of keeping every financial or investment document forever, just in case. But if your New Year’s resolution is to get your financial house in order, our Bowen Reports has suggestions about retaining financial and investment documents. https://bowenasset.com/how-long-to-keep-important-financial-papers/
If you would like a year-end review of your financial situation, or if you have questions regarding year-end strategies, contact Bowen Asset Management at info@bowenasset.com or 610-793-1001.
Disclaimer
While this article may concern an area of investing or investment strategy in which we supply advice to clients, this document is not intended to constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and/or our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.
Past performance should not be taken as an indicator or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. As with any investment strategy or portion thereof, there is potential for profit as well as the possibility of loss. The price, value of and income from investments mentioned in this report (if any) can fall as well as rise. To the extent that any financial projections are contained herein, such projections are dependent on the occurrence of future events, which cannot be predicted or assumed; therefore, the actual results achieved during the projection period, if applicable, may vary materially from the projections.