As we approach the end of the year, it is always beneficial to establish and review financial goals to determine whether any additional actions should be taken. Here are the top 10 year-end planning ideas that we discuss with our clients that should consider.
1 – ESTABLISH FINANCIAL GOALS – The end of the year is a great time to put your goals in writing. For many of us, it is a time when we are naturally more reflective and often aspirational for the year ahead. The formula for success in goal setting is to start by identifying a “stretch goal” or dream of yours and then begin to break it down into smaller, action-oriented components. The acronym SMART is used as a reminder to include all the characteristics of an actionable goal: Specific, Measurable, Attainable, Rewarding, and Time Bound.
2 – MANAGE INCOME TAXES IN RETIREMENT – Determine how much income can be realized before “creeping” into the next tax bracket. Our Retirement Tax Filter® is a way to strategically manage sources of cash flow each year in retirement in order to max out those lower brackets. This is particularly true in retirement, when you will likely have much more control over taxes. The reason for this is that there are a number of different buckets of money to pull from; each with different types of tax treatment.
3 – GIFT APPRECIATED ASSETS TO FAMILY – Rather than gifting cash to family members, it can be advantageous to gift appreciated stock. This is particularly true for family members who are in lower tax brackets. In these cases, the asset is sold with a gain that is taxed at a lower rate (in some cases even 0% or 10%) than would be the case if you sold it yourself and could potentially be subject to 20% or more in long term capital gains taxes. Read this CNBC article where we contributed to a more detailed explanation of this strategy.
4 – MAXIMIZE CHARITABLE CONTRIBUTIONS – Since the passage of the Tax Cuts and Jobs Act, 84% of married couples now claim the standard deduction while only 56% did so previously. In order to get the tax benefit of charitable gifts, it could make sense to lump charitable donations into certain calendar years. One of the best ways to do this is to utilize a donor advised fund (DAF), which is like a holding tank for charitable contributions. You make a donation of assets to the DAF and, in exchange, you receive an upfront charitable tax deduction in the year that your contribution is made. However, you can make gifts from the DAF to your favorite charities whenever you’d like. From the perspective of the organizations you support, nothing changes, but the DAF allows you to control the timing and amount of your charitable tax deduction.
5 – MAKE RETIREMENT PLAN CONTRIBUTIONS – In order to reduce your tax liability and increase your retirement savings, you should try to maximize contributions to your company retirement plan. The amount you can contribute to your 401(k) or similar workplace retirement plan has increased from $19,000 in 2019 to $19,500 in 2020. An additional catch-up contribution of up to $6,500 is available as well if you are 50 or older in 2020 and 2021.
6 – ROTH IRA CONVERSION – The CARES Act, passed in March, temporarily suspended required minimum distributions (RMDs) for this calendar year. For those over the age of 70 1/2, not taking distributions from a Traditional IRA could make doing a Roth IRA conversion more appealing since it could keep you in a favorable tax bracket by reducing your taxable income. If you were already planning on doing a Roth IRA conversion, this may give you an opportunity to convert an even larger amount.
7 – CHARITABLE DISTRIBUTIONS FROM YOUR IRA – If you have money in an IRA and you are over age 70 ½, you can donate money directly from your IRA to a charitable organization without that gift being included in your taxable income. This is called a Qualified Charitable Distribution, or QCD, and is limited to your RMD each year, but not to exceed $100,000/year. This is a great benefit, especially if you are not able to itemize your deductions due to the enhanced standard deduction in 2020.
8 – MAKE ANNUAL GIFTS TO FAMILY MEMBERS – For 2020, the annual gift tax exclusion remains $15,000 ($30,000 for married couples). This means you can gift tax-free and without utilizing any of your lifetime gift exclusion. If you have the financial ability to gift without jeopardizing your own financial independence, it can be a really good idea not only for financial reasons, but also for the personal rewards of being able to see the positive impact you can make on the lives of your loved ones through financial generosity.
9 – REVIEW YOUR RETIREMENT PLAN OPTIONS – For owners of closely-held businesses who do not currently have a qualified plan, you should consider establishing one as this can be an effective way to lower your tax burden. Along with defined contribution plans, small business owners may also want to consider defined benefit plans, cash balance plans, or a combination of the two. Self-employed individuals may establish a SEP IRA, which extends the due date until the filing of your income tax return.
10 – CONSIDER WEALTH TRANSFER STRATEGIES – Given the favorable income tax environment and generous estate tax exemptions and the likelihood that rates could go up in the future depending on the political environment, it makes sense to consider strategies for transferring assets with high growth potential with techniques like Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs). The federal estate and gift exemption amount is $11.58 million per person in 2020 and increasing to $11.7 million in 2021. The current low interest rate environment can make these wealth transfer strategies even more appealing.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.