Financial Planning Advice
A Handy Checklist for Year-End
Our year-end planning tips have proved to be very popular, and we are updating it again with 9 smart financial planning and investment moves that will be helpful in to you before this year comes to an end.
1. Portfolio management - Review your income or investment strategy
Are you reaching a milestone in your life such as retirement or a change in your personal circumstances? Has your tolerance for taking risk changed? We experienced historic volatility this year. The broad-based S&P 500 Index lost over 30% in one month. The sell-off was steep and violent but short-lived.
As November came to close, the major market indexes had recaptured prior highs. It’s a testament to adhering to the long-term financial plan.
Did you take volatility in stride, or feel any uneasiness? A pandemic, a shuttering of the economy, and a swiftly falling stock market are bound to create some anxieties. But if you experienced sleepless nights or sought the safety of cash, now may be the time to re-evaluate risk and your approach.
One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring or one that prods us to sell when volatility surfaces.
The hard data and my own personal experience tells me that the shortest distance between an investor and his/her financial goals is adherence to a well-diversified holistic financial plan. Not sure how to review your investment strategy? Watch this 3 minute video to show you how.
2. Portfolio rebalancing
Despite the rollercoaster ride, overall market performance has been good this year. U.S. equities have provided a nice lift to your portfolio, but you may have too much exposure to stocks as we approach 2021.
If that’s the case, we may need to trim back on equity exposure. However, we may want to wait until January in non-retirement accounts so that any gains are booked in tax year 2021. Consider “harvesting” tax losses. Go to #6 in this article.
3. Take stock of "changes" in your life
Be sure to review your insurance and retirement plan beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen. And don’t forget, the recent SECURE Act’s Impact on Beneficiary Planning.
4. Tax Loss - know the deadline
You have until December 31 to harvest any tax losses and/or offset any capital gains. It may be advantageous to time sales in order to maximize tax benefits this year or next. We may also want to book gains and offset with any losses.
But be aware that short- and long-term capital gains are taxed at different rates, and don’t run up against the wash-sale rule (IRS Publication 550) that could disallow a capital loss.
A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days, either before or after the sale date. (See Schwab: “A Primer on Wash Sales”)
5. Penalty for NOT having Health Care Coverage
Penalties have been eliminated for not maintaining minimum essential health care coverage, according to the Tax Cuts and Jobs Act.
6. Estates of decedents
If you have a loved one that passed away in 2020 the basic exclusion amount of $11,580,000 is up from $11,400,000 for estates of decedents who died in 2019.
7. Credit Allowed for Child Adoptions
The maximum credit allowed for adoptions for tax year 2020 is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019.
8. AMT - Alternative Minimum Tax changes
Tax reform failed to do away with the alternative minimum tax (AMT), but it snags far fewer people.
The AMT exemption amount for tax year 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800).
The 2019 exemption amount was $71,700 and began to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption began to phase out at $1,020,600).
It’s confusing, but most tax software programs run both calculations for you.
9. Charitiable Giving
Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.
Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70½ years old?
A QCD is an otherwise taxable distribution from an IRA or Inherited IRA that is paid directly from the IRA to a qualified charity [Fidelity: “Donating to a charity using a qualified charitable distribution (QCD) ”].
A QCD may be counted toward your RMD, up to $100,000. If you file jointly, you and your spouse can make a $100,000 QCD from your own IRAs. This becomes even more valuable in light of tax reform as the higher standard deduction may preclude you from itemizing.
You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
The points above are simply a summary of financial advice for year-end. You may see provisions that will benefit you. You may also see potential pitfalls. Please feel free to reach out if you have any questions, or check in with your tax advisor.