12 Year-End Money Strategies You Can’t Afford To Overlook
As year-end approaches, there’s still time to make sure you’re on track toward your important financial goals, including maximizing retirement savings and taking steps to reduce your tax exposure. Begin by reviewing the year-end financial planning checklist below, then schedule time to meet with your tax and financial advisors if you have questions or need help implementing these or other strategies. Keep in mind, unless otherwise noted, December 31, 2019, is the deadline to implement each of the checklist items below.
2019 Year-End Planning Checklist
1. Adjust your withholding – You can use the IRS’s online, interactive Tax Withholding Estimator tool to help determine whether you need to provide your employer with an updated Form W-4, Employee's Withholding Allowance Certificate. Use your results to help complete the form and adjust your income tax withholding if necessary. If you receive pension income, you can use the results from the estimator to complete a Form W-4P and give it to your payer.
2. Make employer plan retirement account contributions – There is still time to maximize contributions to your employer retirement plan accounts and ensure you’re not leaving free money on the table if your employer offers matching contributions. Remember, you can claim a tax deduction for contributions to qualified retirement plan accounts, such as 401(k) and 403(b) plans, even if you take the standard deduction and do not itemize your taxes. Roth contributions are not deductible.
3. Use any remaining Flexible Spending Account (FSA) balances – The “use it or lose it” rule applies to workplace flexible spending accounts, so don’t “lose it.” Use any remaining funds before year-end to avoid forfeiting them. Check with your employer to see if your company has adopted a grace period to set aside 2019 money into the beginning of 2020. While allowed by the IRS, employers are not required to extend the deadlines for claims.
4. Make 2019 HSA contributions – Health savings accounts (HSAs) are tax-advantaged medical savings accounts available to taxpayers enrolled in high-deductible healthcare plans. HSA funds may only be used to pay for qualified medical expenses. Funds in an HSA grow tax-free, and unlike a FSA, account balances can grow from year to year.
5. Make charitable contributions – The new tax law increased the limit for charitable donations to 60% of adjusted gross income (AGI). However, you must itemize your 2019 return to deduct qualified charitable contributions. If you make regular charitable donations and do not have other deductions to itemize, talk to your tax or financial advisor about “bunching” or accelerating planned charitable contributions into the current tax year, then take the standard deduction in subsequent years.
By donating appreciated stock or property rather than cashing it out, you may be able to “supercharge” charitable donations. As long as you've owned the asset for more than one year, you get a double tax benefit from the donation. You can deduct the property’s market value on the date of the gift, and you avoid paying capital gains tax on the built-up appreciation.
6. Bunch out-of-pocket medical expenses – The adjusted gross income floor for the medical expense deduction reverted back to 10% of AGI in 2019. If you have significant out-of-pocket medical expenses in 2019, or can prepay certain 2020 expenses in 2019 to bring your total itemized deductions over the standard deduction, you may be able to itemize and take a larger deduction for tax year 2019.
7. Satisfy RMDs – If you’re age 70½ and have money in a traditional IRA or other qualified retirement accounts, make sure you’ve satisfied your required minimum distribution (RMD) for 2019 to avoid paying a penalty of up to 50%. If you turned 70½ in 2019, you have until April 1, 2020 to take your first RMD. After that, you must take RMDs by December 31 each year.
8. Consider a QCD – If you’re age 70½ or over, and have money in an IRA account, you may be eligible to make a Qualified Charitable Distribution (QCD). Distributions are paid directly to a charity by your IRA custodian, are not taxable, and will count toward your required minimum distribution for the year. You can direct all or part of the RMD (up to $100,000 per tax year) to a qualified charitable organization. Strict rules apply, so be sure to speak with your tax or financial advisor before initiating a QCD.
9. Harvest tax losses – Taxes should never be the sole reason for selling an asset. However, if you’re looking to make adjustments to your portfolio, selling certain positions with unrealized losses can help offset other gains. Again, consult with your tax and financial advisor, and beware of the “wash sale” rule that prohibits reinvesting in the same asset within 30 days of the sale for tax purposes.
10. Defer income –If you believe you may be in the same or a lower tax bracket next year, consider postponing a wage increase or year-end bonus until 2020, if your company will allow it. Those who are self-employed generally have more leeway in deferring income. Regardless of your employment status, you can also defer income by taking capital gains in 2020 instead of in 2019. On the flip side, if you believe you will be in a higher income tax bracket in 2020, work with your advisors to determine if accelerating income into 2019 makes sense for you.
11. Avoid the kiddie tax –Congress created the "kiddie tax" rules to prevent families from shifting the tax bill on investment income from the parents’ higher tax bracket to a child’s lower bracket. For 2019, the kiddie tax subjects a child's investment income above $2,200 to the same rates as trusts and estates, which are typically higher than rates for individuals. If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns 24. If you plan to gift stock to a child for them to sell in order to fund college expenses, be aware that if the gain is too large and the child’s unearned income exceeds $2,200, you could end up paying taxes at the same rate as trusts and estates.
12. Make year-end gifts – The 2019 annual gift tax exclusion amount, which is $15,000 for individuals and $30,000 for married couples, allows you to make gifts to anyone you choose without cutting into your lifetime gift and estate tax exemption.
Remember, there are only a few weeks left to implement these and other important financial strategies to help lower your tax exposure and make progress toward your long-term goals. Meet with your tax and financial advisors regularly, and especially at the end of each year, to review your financial goals, ensure your investment portfolio remains aligned with your objectives and risk tolerance, and determine if there are additional steps you can take now to prepare for the year ahead.