2020 Year-End Financial Checklist

The end of the year is always a good time to do a little financial maintenance, take advantage of last-minute tax deductions, and get your financial house in order for next year. Here’s a checklist of some items to consider.

Tax-Loss Harvesting

Do you have losses in your investment portfolio? It may be to your advantage to take them and offset capital gains you realized during the year. Review all investments worth less than you paid and ask yourself if you’d buy the same investment today. If not, sell it. Don’t hang on to it hoping it will, someday, be back to where you bought it.

But if you have losses in investments you really like, but could use the loss, keep in mind the Wash Sale Rule from IRS Code section 1092. It allows you to sell at a loss, deduct the loss, and buy back the same investment or one similar in 30 days or more without penalty. Buy it back in LESS than 30 days and the deduction is disallowed.

You can deduct enough capital losses to offset an equal amount of capital gains plus an additional $3,000. Any unused capital losses can be carried forward and used in the future until they have been used up.

Investment Strategy

Now is a perfect time to analyze your investment strategy. Has anything changed in your life or attitude since last year? Are you more conservative or more aggressive than you were the last time you reviewed your strategy? If so, what changes should be made to your portfolio?

Reallocate and rebalance

With the stock market at all-time highs, your portfolio may have become stock heavy, moving you away from your investment strategy and generating excessive risk. If that’s happened, it’s a good time to rebalance your accounts. And don’t look only at your investment accounts and IRA. Check the allocation of your 401(k) or 403(b) as well.

Before you pull the trigger to rebalance your investment account, consider the capital gains that will be generated and how you intend to pay for them. Tax-loss harvesting, mentioned above, should be part of your rebalancing thought process. If you’re an Alhambra client, we always consider the taxes that will result from rebalancing and use tax-loss harvesting, whenever possible, to offset those gains.

Roth Conversions

Consider whether now is a good time to convert some of your pretax investments, such as traditional 401(k)s or IRAs, into a Roth IRA. Some 401(k) plans have a Roth option in the plan. Some 401(k) plans also have an in-service distribution option that allows you to transfer money out of the plan and into an IRA while you’re still working for an employer.

On any conversion from a tax-deferred plan to a Roth, you’ll pay taxes, but not early withdrawal penalties, on the conversion. The advantage is accessing the money in the Roth after age 59 ½ on a tax-free basis.

Check with a tax professional to see if a Roth conversion makes sense for you. It’s not right for everyone.

Manage current and future income

If you haven’t contributed the maximum of $19,500 to your 401(k), make a one-time contribution. And if you’re over 50, don’t forget that additional $6500 catchup contribution available to you. It has to be done by December 31st.

If you’re self-employed you can contribute to a Simplified Employee Pension (SEP) up to 25% of your net earnings up to a total of $57,000 for 2020 and your contributions can be deducted as a business expense.

There’s a little-known tax credit called the Savers Credit that rewards lower to middle-income taxpayers for contributing to their retirement. Taxpayers who qualify receive a tax credit of up to $1000, or $2000 for married couples filing jointly. It is a tax credit, therefore it reduces your taxes dollar-for-dollar.

Deductible IRA Contributions

You have a little more time to work with this deduction. Contributions to an IRA can be made as late as April 15th next year. For 2020 you can contribute up to $6,000 or $7,000 if you are 50 or older.

Required Minimum Distribution

Normally, if you’re 72 or older, you have to take the Required Minimum Distribution from your IRA and if it’s not out by December 31st you’ll have to pay hefty penalties.

But this year is different. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, waives required minimum distributions during 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. This waiver includes RMDs for individuals who turned age 70 ½ in 2019 and took their first RMD in 2020.

If an individual has already taken an RMD in 2020, including someone who turned 70 ½ during 2019, the individual will have the option of returning the distribution to their account or other qualified plans.

Since the RMD rule is suspended, RMDs taken in 2020 are considered eligible for rollover. Therefore, RMDs can be rolled over to another IRA, another qualified retirement plan, or returned to the original plan.

Qualified Charitable Distribution

Looking into 2021, if you’re required to take an RMD, which is taxed as ordinary income, you can make a Qualified Charitable Distribution, also known as an IRA Charitable Rollover, of up to 100 thousand dollars to organizations that meet IRS rules as a charity. If you’re married, your spouse can also give up to 100 thousand dollars.

To qualify, your IRA custodian or trustee must send the donation directly from your IRA to the charitable recipient. The gift is not included in gross income and therefore becomes a non-taxable distribution. However, since it’s not included as income, the IRS doesn’t allow you to claim the gift as a charitable deduction.

Don’t skip the simple stuff

It may be basic, but don’t overlook making a list of the tax forms you need. It will help you avoid confusion later. Some examples of what you might need: W2s (for traditional jobs), 1099s (for independent contractor work), 1098-E (if you are repaying student loans, you’ll need this to claim the student loan interest deduction), 1099-INT (interest), 1099-DIV (investment income).

Adjust your W-4 withholding

Do a preemptive strike. Consider adjusting your W-4 withholding for next year. If you think you’ll owe taxes in 2020, having more money withheld from your check at the beginning of the year can help. It only requires a little paperwork from the HR department.

Clean out and give away

Go through your clothes. Go through your attic. Get rid of stuff you don’t need, don’t wear, don’t use, or doesn’t have sentimental value. You’re better off getting a tax deduction for stuff that’s just taking up space in your house, your garage, or your storage unit.

Other Charitable Gifts

There may be more options to give to charity than you thought about. The first thing that usually comes to mind is giving cash, stocks, bonds, and mutual funds—liquid assets the charity can quickly turn into cash.

You can also give complex assets—illiquid assets—such as real estate, restricted stock, insurance interests, private company stock in both S and C corporations, private equity interests in LLCs and limited partnerships, oil and gas interests, agricultural commodities like grain, some alternative investments, even Bitcoin and other cryptocurrencies.

Giving complex assets is a little longer process because the gift has to be appraised. The appraisal can be done 60 days prior to the date of the gift but no later than when the donor files their tax return. Giving complex assets may be part of your strategy for next year.

Another charitable giving option is life insurance. Purchase a life insurance policy and name the charity as owner and beneficiary. You can fund the policy with a lump sum or pay premiums. Both are tax-deductible at the time of the gift.

You can also gift an existing policy. For example, you may be considering whether to cancel a policy you purchased for a need that doesn’t exist anymore. Transfer the policy to the charity, making it the owner and the beneficiary. You’ll get a current tax deduction for the policy’s fair market value.

Front-load giving

If you know your income will be more next year than in some future years consider contributing now the amount you plan to give over the next 5-10 years. It’s a strategy called bunching.

You can make the donation to a Donor Advised Fund which gives you the flexibility of deciding later what charity(s) you want to give. Instead of gifting directly to charities, you establish an account at a sponsor organization. You make an irrevocable contribution to that account and receive a tax deduction that year. Then when you’re ready to grant money to a charity you tell the sponsor who to give it to and how much. The sponsor organization does all the due diligence and all the record-keeping.

Pay your property taxes early

If you have to pay property taxes in January, pay them in December. By paying now, you pick up another tax deduction for this year.

Health Savings Accounts

If you’re eligible for a health savings account and haven’t made your full contribution this year, it’s not too late. If you have self-only high-deductible health coverage, you can contribute up to $3,550. If you have family high-deductible coverage, you can contribute up to $7,100. In addition, participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution.

Beneficiary Audit

And, while you’re reviewing everything, check your beneficiaries. Maybe you’ve had a life change—death, divorce, remarriage, the birth of a grandchild, you’ve changed your mind about what organizations you want to give posthumous bequests to, or there’s someone you just don’t like anymore. Whatever the case, review your beneficiaries and make sure they’re exactly the way you want them right now.

There are lots of places you may have named beneficiaries:

  • Life insurance policies – don’t forget policies through your employer
  • Annuities
  • Traditional IRAs
  • Roth IRAs
  • Inherited IRAs
  • 401(k) account at your current employer
  • 401(k) accounts at previous employers
  • 403(b)s
  • Deferred Compensation Employer Plans
  • 457 Government Plans
  • Health Savings Accounts
  • 529 Education Savings Plans
  • Transfer on Death (TOD) or Pay on Death (POD) accounts. These can be at banks, investment firms, savings and loans, or any financial institution.
  • Pensions
  • Wills
  • Trusts