Wow! What a year so far. With all of the relief packages passed due to COVID, there is a lot to stay on top of. Everything from skipping Required Minimum Distributions to Withdrawal Rules around Retirement accounts, and everything in between.
As part of our practice, Year End Planning is front and center the last quarter of the year (every year!)
Here are some things to consider as we close out the 2020 chapter:
- Charitable Donations – While charitable donations by check or cash are the most common, you may also donate stock. Consider looking at low cost basis stock that have grown in value for larger charitable contributions. If you plan to itemize, you can receive a tax deduction based on the fair market value as of the date of the gift. This allows both you and the charity to avoid paying taxes on the gain. This can be used for investments that have been held for at least 12 months. If you do not itemize, you can look into combining two or three years of charitable contributions that you would normally make over multiple years, into a single tax year. This strategy is called “Bunching”. The bunching technique can benefit donors whose itemized deductions fall below the standard deduction ($24,800 for married filing jointly, $12,400 for single filers in 2020), as long as there is sufficient taxable income to fully deduct. When using the bunching strategy, you can use charitable vehicles such as a Donor-Advised Fund, in order to receive an immediate tax deduction. You can then take your time giving out to charities from there. To receive credit for 2020 tax year, this would need to be completed by December 31, 2020.
- Required Minimum Distributions (RMDs) – The CARES Act of 2020 (in response to COVID-19) allowed for any taxpayer subject to RMDs to skip those withdrawals in 2020 if they wished. If you are charitably inclined, the maximum to donate from your IRA each year is 100k as a Qualified Charitable Distribution. If your RMD is over 100k each year, you may still want to utilize this opportunity in 2020.
- Tax Loss Harvesting – At Nautilus Advisors, we do this throughout the year, but we also pay special attention to capital gain distributions in mutual funds. Projected capital gains on mutual funds are typically released in November. If you have assets spread out in multiple firms, you may want to gather the information from all firms on any losses or gains, and come up with a plan to minimize tax exposure. We typically see CPAs of our clients quarterbacking this effort. We work closely with our clients CPAs, especially the last months of the year.
- Schedule a “End of the Year” call with your CPA – Run a projected income analysis looking at all sources of income and withholding information. When reviewing your projections, take a look at any benefits available through your employer if you are looking for ways to defer income (maximizing retirement vehicles, health savings accounts, etc).
- Annual Gifting – Currently, the federal estate and gift exemption is 11.58 million per person. In 2020, the federal annual gift is $15,000 per person. Consider gifting to children’s 529 college savings plans or custodial accounts prior to year-end.
- Health Savings Accounts – Did you have a high deductible health plan this year? Looking for other ways to defer income while investing? Health Savings Accounts have many unique features to consider.
- Roth Conversions – If you are of the mind set taxes will go up in the future, and your income was impacted due to the Pandemic of 2020, a Roth conversion may be a consideration. You would pay income taxes on the amount converted from your Traditional IRA, but the funds would grow tax free and qualified distributions in the future would not be subject to taxes.
- Employee Stock Plans – was your income impacted this year? Do you have stock options you are looking to exercise? There are important tax considerations around stock plans/option exercising. Make sure you review these benefits to determine if this may be the year to exercise some of your stock options.
Year End is a great time to not only review your investments but strategize with year end financial moves that have the potential to add more money to your pocket after taxes. Every individual has a unique situation, which is why financial planning is a fundamental part of our practice. Reach out to us if you would like to discuss these strategies in more detail.