2019 Year-End Financial Checklist
As 2019 draws to a close, it is time to consider year-end strategies and begin thinking about your finances for the new year. To help you get started, we've put together an organizational list of key planning items to consider.
Financial Planning Checklist
Consider a multi-year charitable giving approach
If you're like many people, you may still be adjusting to the new tax laws that went into effect in 2018. While rates went down for many people, many itemized deductions were limited or lost entirely. That means it's all the more important to get an early start in order to make the most of tax-saving strategies before the year’s end.
In past years, itemized deductions included those such as state and local income tax, property tax, mortgage interest, medical expenses, charitable contributions, tax preparation fees, home office expenses, and others. Under the new tax law, though, many itemized deductions have been capped, reduced, or eliminated. For example, the deduction for state and local income and property tax is limited to a total of $10,000 for 2019. The mortgage interest deduction is now limited to interest paid on the first $750,000 of your home loan for new home loans acquired after December 15, 2017. Interest on home equity loans is no longer deductible.
When compared with 2017, nearly 30 million more filers took the standard deduction for 2018, and more of the same is expected for 2019. This is where multiyear planning may help: by “bunching” charitable planning in the same year, it can often lead to itemizing in those years. Bunching means concentrating deductions in a single year, then skipping one or two years. This strategy can work well when your total itemized deductions for a single year fall below the new standard deduction. The catch is that this strategy requires having the financial capacity to pack all your deductions into one year.
Here's how it could work: Instead of making annual charitable gifts, investors may want to give two, three, or even five years' worth of donations in a single year, then take a few years off. In the years where little to no gifting or medical expense payments are made, you could still use the standard deduction. And in years when you did give or had medical expenses that exceeded 10% of adjusted gross income, your itemized deductions would then exceed the standard deduction. For example, in a giving year, your itemized deductions would be $29,400, which is $5,000 higher than the $24,400 standard deduction, therefore reducing your taxable income in that year. Bunching donations and medical expenses in a single year can increase the value of deductions beyond the threshold for a single year, and then the larger standard deduction can be taken in the "skip" years.
If you're considering a bunching strategy, a donor-advised fund may be appealing. That way you can contribute several years of charitable contributions in one year, making the most of the deduction in that year but spreading your giving over multiple years. A donor-advised fund also lets you keep some control over the way your charitable contributions are distributed.
If 2019 is a year to bunch gifts for itemizing and you choose to give at year’s end, keep track of your donations to charities in all forms and consider strategies that may qualify you for larger tax deductions. For example, if you itemize your deductions, donating to charities from a taxable account can reduce your tax bill. This is particularly true if you can contribute appreciated securities you have held in your account for at least a year. Doing so not only entitles you to a tax deduction, but also allows you to help eliminate the capital gains tax and effectively rebalance your portfolio without significant tax recognition. It is important to note that to donate low basis stock, most charities have a deadline of December 21-26 to ensure the transaction is completed by year’s end.
As a reminder, for all non-cash contributions over $250, you'll need a receipt that includes a description of the item and other details. Donations for the current tax year must be made by December 31. Also of note, if you are over age 70 ½ and taking Required Minimum Distributions (RMDs), you can make a Qualified Charitable Donation (QCD) directly from your IRA using your RMD. A QCD counts toward your RMD for the year—up to $100,000—and isn't included in your taxable income.
Harvest your losses to lower your tax bill
You should not let the tax tail wag the dog, but you should consider that capital losses can offset taxable capital gains from investments and reduce your tax bill. Up to $3,000 of excess capital losses can also be deducted against “ordinary” income like wages.
Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss and replacing it with a similar though not identical investment. In doing so, an investor maintains the risk and return characteristics targeted in the portfolio but still generates losses that can be used to reduce current taxes. The tax savings that is generated can then be reinvested and will compound over time. Tax-loss harvesting needs to be completed by December 31.
Spend your Flexible Spending Accounts (FSA) dollars
If you have a flexible spending account for health care expenses (usually referred to as a health flexible spending account or FSA) and you haven’t used all the money in it, those funds could be forfeited because of the “use-it-or-lose-it” provision if you don't use them by year-end. If you don’t make use of funds by year-end, most plan sponsors have the option to allow employees participating in health FSAs to carry over—instead of forfeiting—up to $500 of unused amounts remaining at year-end. You should check with your plan sponsor to see if this option is available to you. A key difference between these types of accounts and a Health Savings Account (HSA) is that the latter allows you to roll over all your funds year-to-year (the HSA is also usually tied to High Deductible Healthcare Plans, or HDHP). But no matter what, you should understand your outstanding balance and put it towards something before the year is up. Some providers even allow purchasing a gift card or store credit for later use. It's also a good time to calculate your FSA allotment for next year, based on your current excess or deficit.
Contribute to a Health Savings Account (HSA) to reduce taxes
The IRS maximum annual contribution limit for HSAs in 2019 is $3,500 for individuals electing single coverage under an HSA-eligible health plan (also known as an HDHP), and $7,000 for those electing family coverage. Individuals aged 55 and older may contribute an additional $1,000 (this applies to both single and family HDHP coverage). Family coverage includes any level of coverage other than self-only coverage, if offered by the employer. The deadline for 2019 contributions to an HSA is April 15, 2020. See our recent blog post to learn more about HSA’s here.
Make a strategy for stock options
If you hold stock options, now is a good time to develop a strategy for managing current and future income. Consider the timing of a nonqualified stock option exercise. Would it make more sense to avoid accelerating income into the current tax year or to defer income to future years, considering your estimated tax picture? Unless you are worried about your employer’s stock price dropping precipitously before year-end, you should consider deferring your exercise until after December 31. Waiting until the new year means you’ll defer the tax you owe from exercising your options until the 2020 tax year, which you may not have to pay until April 2021.
Manage your estate plan and amend if necessary
Your estate plan establishes who receives your assets and who will act as guardian for any minor children when you pass away.
To help ensure that your estate plan stays in tune with your goals and needs, you should review and update it on an ongoing basis to account for any life changes or other circumstances. If you haven't done so during 2019, take time to:
- Check trust funding
- Update beneficiary designations
- Review trustee and agent appointments
- Review provisions of powers of attorney and health care directives
- Ensure that you fully understand all your documents
If you don’t yet have an estate plan and you have significant assets outside of retirement accounts, such as a home, other real estate, individual or joint brokerage accounts, or additional investments, it’s a good idea to review your situation with an attorney who specializes in estate planning and get one in place. For parents of minor children, creating a will is particularly important.
Review your insurance policies
Make sure you and your loved ones are well-protected if something happens to you. Now is an appropriate time to consider whether any major life changes, like the birth of a child in the past year, might mean the need for insurance. If you do have enough coverage, it’s still a good time to review the different types of coverage you have and make sure beneficiary designations are up-to-date. Term life insurance makes more sense for most young families than whole or universal life insurance. And while it might seem like a bad time to do so, it is actually a good time of the year to gently review with parents or elders their own coverage. Long-term care coverage for older parents is an often-overlooked area.
Check your credit report
It's important to monitor your credit report regularly for suspicious activity that could indicate identity theft. Federal law requires that each of the nationwide credit reporting companies (Equifax, Experian, and TransUnion) provide you with a free copy of your report every twelve months, at your request. You can request a copy from AnnualCreditReport.com. With the growing identity theft of children, we recently outlined the steps to take for monitoring a child’s credit as well. Check out that post here: https://gapfinancialservices.com/blog/protecting-your-kids-identity-and-credit
Consider a 529 college savings plan account for your kids
If you have kids, the IRS has the ultimate gift for you this holiday season: the 529 college savings plan. When it comes to planning for your child’s college education costs, few things have the potential to prove as financially rewarding as enrolling early in a 529 and growing your savings tax free. If you already have a 529 plan in place but want to make sure you are on track to meet your target, Gap Financial offers assistance to get you on track or confirm your strategy is adequate.
If you are fortunate enough to have a more substantial amount of money to contribute, super-funding a 529 offers significant benefits both in terms of objective savings results and behavioral finance perspectives. For example, instead of the $15,000 annual contribution limit, each parent can pre-fund up to five years’ worth of contributions, up to $75,000 (5 x $15,000). Together, that means a married couple can open a 529 plan with $150,000 for each child and get even more value from compounding the larger contribution from the start.
The tax law passed in 2018 allows 529 accounts for the first time to also be used for up to $10,000 of primary and secondary (Kinder-12) school tuition expenses each year.
Consider a 401(k) rollover or a Roth conversion
The tax-free benefits of a Roth IRA are well defined, but remember to consider the costs of conversion, the Medicare surtax, and gains on company stock in a 401(k).If you're interested in laying the groundwork for tax-efficient withdrawals in retirement, it's smart to have a mix of traditional and Roth accounts. That way you can withdraw monies from taxable and nontaxable accounts to keep your taxable income in the lowest possible tax bracket.If most of your retirement savings has been contributed to pretax vehicles such as traditional 401(k)s, SEPs, or IRAs, your withdrawals will be taxed at ordinary income rates. If you have had some large capital losses this year, consider converting some traditional IRA or 401(k) money into a Roth IRA, where withdrawals in retirement are tax free.You'll pay income taxes now on the converted amount, but you'll pay lower taxes in retirement.
With the recent tax cuts, year-end Roth conversions can now be more valuable than in previous years. One strategy is to convert up to the limit of your tax bracket. For example, in 2019, a couple with taxable income of $125,000 would have a 22% marginal tax bracket (which tops out at $168,400). So they could convert up to $43,400 before maxing out of the 22% bracket. If you need guidance to determine whether a Roth conversion strategy is right for you, Gap Financial has sophisticated tools and resources that allow us to help you establish the amount and timing of conversion.
*Chart does not account for the Medicare surtax on high earners. Source: IRS.
Complete Required Minimum Distributions
For beneficiary IRAs or inherited IRAs, don’t forget to complete the Required Minimum Distributions (or RMDs). These apply regardless of the account holders age.
With Traditional IRAs, 401(k)s and other retirement plans, RMDs are not required until an individual reaches age 70 ½. The required payout is a percentage of total assets on the prior year’s closing balance as of December 31. To avoid a possible tax penalty, RMDs need to be taken within the calendar year. Gap Financial can assist you with RMD calculations. If desired, you can find more from the IRS here.
Want to donate to charity when age 70½ or older? As mentioned above, consider a qualified charitable distribution (QCD). It's a direct transfer of funds from your IRA custodian and is payable to a qualified church or charity of your choice, which counts toward your RMD for the year, up to $100,000. It's not included in gross income and does not count against the limits on deductions for charitable contributions. These can be significant advantages for certain high-income earners, but the rules are complex so be sure to consult your accountant or Gap Financial.
The Bottom Line
The end of the year is a good time to assess your financial situation. The last day of December is often a significant deadline, so it can make sense to do some year-end housekeeping, including evaluating tax strategies, reviewing insurance and estate plans and making plans for the coming year. Of course, tax planning is not a one-and-done end of year exercise. To help reduce taxes and make definable progress in your financial future, it makes sense to be planning throughout the year. Gap Financial can help align your goals with current tax laws and investment vehicles to generate the most favorable outcome. Reach out to us today to schedule a year-end review meeting.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a fiduciary financial planner, accountant, and/or legal counsel for advice for your specific situation.