Act now! Financial planning steps to take before year-end

The end of the calendar year is always a good time to review, reflect and recalibrate both personal and financial goals. That is true now more than ever given the many changes that have occurred in the wake of the coronavirus pandemic. In some cases, the virus may have impacted financial stability or caused a shift in goals or objectives. Legislation passed by the U.S. government in the CARES Act also have changed some of the tax filing rules for 2020 tax returns.

December 31st often marks an important deadline to make some key strategic financial moves. Certain tasks need to be completed before year-end in order to maximize financial benefits, or avoid costly mistakes that can result in fees, higher tax penalties or missed opportunities. Below we highlight 10 tips to consider for your 2020 year-end financial planning.

1. Maximize tax deductions: Take the initiative to reduce your overall tax bill for 2020. Some moves that need to occur in 2020 include completing any itemized expenses, such as pre-paying property taxes for 2021, paying for any business related expenses and making charitable contributions. The CARES Act create a slight change aimed at promoting charitable giving in 2020. Those tax filers who claim the Standard Deduction and do not file an itemized tax return would normally not receive a tax benefit from a charitable contribution. However, the CARES Act allows for an “Above the Line” deduction for up to $300 in cash donations made direct to a 501(c) charity in 2020.

2. Review withholding and estimated tax payments: Be sure that you are withholding enough to satisfy your federal tax liability. Failure to withhold sufficient tax (or pay sufficient quarterly estimated tax) may cause you to owe tax with your return that also is subject to interest and penalties. If you make estimated tax payments throughout the year, check in with your accountant to make sure payments are on track to meet requirements. You may need to increase your tax withholding payments before year-end to avoid any penalties on your 2020 tax return.

3. Contribute to retirement accounts: Individuals can utilize a variety of  different types of retirement savings accounts to growth wealth for retirement. Contributions to traditional IRAs, Simplified Employee Pension (SEP) IRAs and Roth IRAs can be made up until the tax deadline of April 15th, or even later when requesting a tax filing extension. The one exception that does require contributions for the calendar year to be made by Dec. 31st is the 401(k) plan. A 401(k) is a company-sponsored retirement account. Employees can contribute a maximum of $19,500. The Dec. 31st deadline also is an important date to meet if your employer offers a “match” on 401K contributions. Those employer “match” contributions are too good to pass up as it is the equivalent of getting an immediate 100% return on dollars invested.

4. Rethink taking a retirement distribution: Those individuals over the age of 70 ½ are required to take minimum distributions from their IRA accounts. However, the 2020 CARES Act provided a waiver that allows IRA holders over the age of 72 to opt out of their required minimum distributions for Tax Year 2020. If you have not yet made a distribution for 2020 and don’t need the cash flow, you may want to skip the distribution to reduce taxable income.

5. Contribute to a 529 college savings accounts: 529 accounts offer tax-free savings for college education expenses. Although rules vary depending on the state, many provide a state income tax deduction for contributions. However, those contributions must be made by Dec. 31 for the 2020 tax year.

6. Consider year-end financial gifts: When planning for generational wealth, many people often think about estate planning strategies they can do now to reduce the tax penalties for their heirs in the future. Individuals can give up to $15,000 to as many beneficiaries as they like each year without paying a gift tax or decreasing the lifetime estate tax exclusion amount. For example, if a married couple wants to maximize gift amounts to their four grandchildren, they could each gift $15,000 for a total of $120,000 in tax free gifts.

7. Review investment portfolios: Year-end is always a good time to meet with a financial advisor and review investment goals and objectives. Based on investment performance in 2020, investors may need to adjust portfolio allocations to reduce concentration risk and improve diversification.

8. Consider selling stocks: 2020 was a wild ride on Wall Street. Some stocks have soared, while other sectors have struggled. Although the usual year-end advice is to sell stocks for a loss that can be used to offset income, investors also may want to consider selling stocks to realize gains. Investors can use those proceeds to fund contributions to IRA or 529 accounts, redeploy capital into alternative assets such as real estate, pay off debt or increase cash reserves.

9. Review your credit score: Year-end is a good time to take stock of your overall financial health. Especially for those who are working to establish credit in the U.S., it is a good time to review your credit score and take note of any improvement or decline in that score that might prompt a change in strategy.

10.Review cash reserves & budgets: It is always wise to have cash reserves set aside for an emergency, such as an illness or job loss. The 2020 coronavirus pandemic has been a health and economic crisis rolled into one that has brought those emergency scenarios to the forefront for many individuals and families. Although it is hopeful that an end to the pandemic is near with the development of vaccines, it is still a good time to review cash reserves and budgets for 2021, especially if personal circumstances have changed. If your savings or cash reserves are getting low, create a plan to replenish those accounts.

As with any investment and financial planning strategy, it is always wise for investors to conduct careful due diligence and work with a trusted advisor.

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