Broker Check
Year-End Planning Checklist

Year-End Planning Checklist

December 21, 2020
Share |

I know it’s one of the busiest times of the year and we have discussed year-end planning in prior conversations, but let’s concentrate on taxes before the new year begins.

Many questions about the new administration have come my way, including questions about new tax proposals. Joe Biden’s proposed plan looks aggressive, but it may not get out of the starting gate if the Republicans continue to hold the Senate. As you may know, two early January runoff elections in Georgia will determine the fate of the upper chamber. However, there is bipartisan support for what might be called The SECURE ACT 2.0. Recall that The SECURE Act, which passed Congress a year ago, updated rules and regulations governing retirement accounts.

There are plenty of tweaks that we might see. For example, might RMDs for IRAs rise to 75? Could we see bigger catch-up provisions? Or greater flexibility for individuals 60 and older who are attempting to save for retirement?  Maybe, but let’s not jump too far into hypotheticals. Any possible changes are in the planning stage and Congress is more likely to focus on Covid relief early next year. Besides, comprehensive bills take time to wind through Congress. Instead, let’s focus on tying up loose ends as the year comes to a close. 

Before we jump into year-end planning, I want to stress to you that it’s my job to partner with you. I can’t overemphasize this, and I would be happy to review your options. As with any tax matters, we like to coordinate with your tax advisor.

9 Tax Facts and Tips to Save You Money

  1. The increased standard deduction has simplified filing for many. The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from last year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400, up $200 from 2019. For heads of households, the standard deduction will increase to $18,650, up $300. The personal exemption for tax year 2020 remains at 0, as it was for 2019. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

  2. You may be eligible to take a $2,000 tax credit for each child. This credit is available to parents as long as your child is younger than 17 years of age on the last day of the tax year, generally Dec 31. It begins to phase out at $200,000 of modified adjusted gross income for single filers. The amount doubles to $400,000 for married couples filing jointly.

  3. Tax brackets and tax rates have changed. Every year, the tax brackets for taxable income are adjusted based on the rate of inflation. Table 1 at the end illustrates marginal tax brackets based on taxable income.

  4. Limitations on itemized deductions. If cash expenses that are eligible to be itemized fail to top the standard deduction, skip Schedule A and take the standard deduction. It’s that simple. If you itemize, please be aware that deductions for state and local income taxes, property taxes, and real estate taxes are capped at $10,000 total. Anything above cannot be written off against income, though a recent IRS notice grants a workaround for some small business taxpayers.

    Taxpayers that use pass-through entities (PTE), including S-corporations, some limited liability companies, and partnerships may qualify depending on your state. This workaround is not available for sole proprietors and single-member LLCs.

    According to the American Institute of CPAs, the PTE may deduct the entity’s state and local income taxes as a tax on the business at the federal level and avoid the $10,000 cap.

    State proposals would also provide that the owner may claim a credit on the owner’s state income tax return for the owner’s distributive share of the taxes paid by the PTE. It’s a complex maneuver that is only allowed by a few states, but it can help reduce your tax liability if you qualify, and more states are expected to pass legislation to get on board with this workaround.

  5. For charitable contributions, you may generally deduct up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. In 2020, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income.

  6. Elimination of penalties for not maintaining minimum essential health care coverage, according to the Tax Cuts and Jobs Act, effective in 2018.

  7. Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from $11,400,000 in 2019. These figures can be doubled for married couples through a simple estate planning technique. The annual exclusion for gifts is $15,000 for calendar year 2020, as it was in 2019.

  8. 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.

  9. Changes to the AMT–the alternative minimum tax. 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 not straightforward, but most tax software programs run both calculations for you.

  10. There is a 20% deduction for business owners. The new law gives “flow-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.

    This is a very valuable benefit to business owners who aren’t classified as C-corps and can’t benefit from 2018’s reduction in the corporate tax rate to 21% from 35%. Individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their net qualified business income (QBI) from a trade or business, including income from a pass-through entity.

    In general, if total taxable income in 2020 is under $163,300 for single filers or $326,600 for joint filers it’s simple. The 20% QBI deduction applies to the qualified business income. The deduction does not reduce earnings subject to the self-employment tax. Above those income limits things quickly get complicated. There are limitations , excluded professions and W-2 wages tests. Feel free to check with your tax advisor to see how you may qualify. Most tax software programs will run the calculation, but proper planning can help you maximize this deduction.

The points above are simply a summary. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s have a conversation. 

9 Smart Planning Moves to Consider

Investment and Financial Planning

  1. Review your income or portfolio 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 a steep and violent sell-off within one month.

    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 the risk in your portfolio.

    One of my goals has always been to remove the emotional component from investing. It’s human nature to load up on stocks when the market is soaring or 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 portfolio as part of a holistic financial plan.
  1. Rebalancing your portfolio. Despite the rollercoaster ride, overall market performance has been good this year. U.S. equities have provided a nice lift to your portfolio, so we have maintained a conservative tilt despite a recent move adding to stocks slightly.

    We may shift further from a few risk-off positions we had held for some time as we have more clarity on the economy, government and COVID.
  1. Take stock of changes in your life and review your insurance policies and estate planning documents to ensure that you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
  1. Tax loss 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.

    Please remember 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.

  2. Mutual funds and taxable distributions. This is best described using an example:

    If you buy a mutual fund on December 15 and it pays its annual dividend and capital gain on December 18, you will be responsible for paying taxes on the entire yearly distribution, even though you held the fund for just three days. It’s a tax sting that’s best avoided when possible, so we are cautious about purchases in taxable accounts close to the end of the year. It’s usually better to wait until after the annual distribution to make the purchase.

  3. Required minimum distributions (RMDs) are minimum amounts the owners of most retirement account must withdraw annually after they have reached a certain age. As we have let you know over the past several months, the CARES Act waived the RMD requirement in 2020, but let’s address RMD requirements at a high level.

    The SECURE Act made major changes to RMD rules. It changed the starting age for RMDs from 70½ to 72 for those who hadn’t reached 70½ by January 1 of 2020. Some plans may provide exceptions if you are still working (IRA FAQs: Required Minimum Distributions).

    If you reached the age of 70½ in 2019 you are stuck with the old RMD tables. Your first RMD can be delayed to April 1 of the following tax year, which can make sense in certain circumstances but please be aware that you’ll have to take both your fist and second RMDs in the same year, which could bump you into a higher tax bracket if your other income streams remain the same. Once again, this is when we must plan ahead and assess the tax outlook for both years to find the right solution for you.

    The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs, but do not apply to Roth IRAs, except for inherited Roth IRAs.

    If you miss your RMD deadline, there may be a penalty of 50% of that year’s RMD!

  4. Contributions to a Roth IRA or Traditional IRA. A Roth gives you the potential to earn tax-free growth (as opposed to the tax-deferred growth of a Traditional IRA) and allows for federal tax-free withdrawals if certain requirements are met.

    You may also be eligible to contribute to a Traditional IRA. Contributions may be fully or partially deductible, depending on your state of residence, income, and circumstances. Total contributions for both accounts cannot exceed prescribed limits. The annual contribution limit for 2019, 2020, and 2021 is $6,000, or $7,000 if you’re age 50 or older. You can contribute if you (or your spouse if filing jointly) have earned income.

    There are income-based limitations for each type of IRA. For Roth IRAs, higher incomes will phase out the annual allowable contribution. Ineligibility for Roth contributions begins when Modified Adjusted Gross Income (MAGI) exceeds $139,000 for single filers and $206,000 for joint filers. Again, there are workarounds such as the Backdoor Roth and Mega Backdoor ROTH, but those are complex transactions. As the common professional disclaimer goes, “Do not try this at home!”

    For Traditional IRAs, contributions are allowed for any income level but the deduction is phased out when MAGI is $206,000 for joint filers. Also keep in mind that if you are covered by a retirement savings plan at work you may not be able to deduct the contribution.

    Another welcome provision of the SECURE act is that starting in 2020, there is no age limit on making regular contributions to traditional or Roth IRAs.

    You can make 2020 IRA contributions until April 15, 2021 (Note: statewide holidays can impact final date).

  5. College savings. A limited option called the Coverdell Education Savings Account (ESA) allows for a maximum annual contribution of $2,000. While contributions are not tax deductible, distributions are tax free if used for qualified education expenses. Contributions must be made before the beneficiary turns 18, but are subject to income limits. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individuals MAGI for the year is less than $110,000 ($220,000 Joint).
      A 529 plan allows for much higher contribution limits and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. As with the Coverdell ESA, contributions are not tax deductible, although some states may allow a partial deduction.
  1. Charitable giving. Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31 and potentially offset any income. If you are over 70½ years old , then you may qualify for what’s called a “qualified charitable distribution (QCD)”. A QCD is a tax-free distribution from an IRA or Inherited IRA that is paid directly from the IRA to a qualified charity.

    A QCD may count toward your RMD, up to $100,000, directly reducing your gross income. This becomes even more valuable in light of tax reforms as the higher standard deduction may preclude you from itemizing regular cash donations.

    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 so you can separate the timing of the tax deduction from the actual donation to the end charity.

Please feel free to reach out if you have any questions and check in with your tax advisor to see if you meet eligibility thresholds.

Cruising at 30,000 feet

November was a standout month for stocks, as illustrated by Table 2. The major U.S. stock market indexes recorded new highs, including the smaller-company Russell 2000 Index, which had a stellar month. In particular, the better-known Dow Jones Industrial Average eclipsed 30,000 for the first time ever. It has been an impressive rally from March’s low when unemployment soared, and the economy was contracting at its fastest rate in history due to lockdown measures.

Catalysts During November

A bitter election is over and we have a new President. Whether you are jubilant, bitterly disappointed, or somewhere in between, a big unknown has been erased.   Talk of civil strife pre-election didn’t materialize and we have a degree of certainty where uncertainty once existed. The election removed a hurdle for investors, and investors seem excited about the prospect of having a divided government. 

In addition, the announcement of at least two vaccines for Covid-19 received a very warm welcome from investors and the public. So far, the economic recovery has been far more robust than nearly every economist has anticipated.

With new vaccines, beaten-down sectors such as leisure, hospitality, travel, and the broad-based service sector have a fighting chance to recover next year. But success is dependent on approval of the vaccines, and acceptance and a quick rollout to the public. Though we may see more volatility, the straightest line to your financial goals hasn’t changed. The financial plan is still your roadmap forward.

I hope you’ve found this review to be educational and helpful. Once again, before making any decisions that may impact your taxes, please consult with us or your tax advisor. Let me once again emphasize that it is our job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.