Close out 2020 with these key financial planning tasks

Jeff Witz, CFP

What are some financial planning tasks I should focus on before year-end?

We are now in the final months of what has been a difficult 2020 for many. Every year, we like to present a number of year-end tasks everyone should cross off their checklist. This time of year presents the perfect opportunity to review and possibly adjust your financial planning strategies. You should update your accounts and see where you stand with many of the goals you set at the beginning of the year.

Check on the status of your emergency fund. Did you need to dip into it at all this year? Have your necessary expenses changed? It’s always a good idea to review the balance of the account as well as your budget to see whether additional funds need to be added to bolster the account. The general rule of thumb for emergency funds is to have 3 months of necessary expenses if you are a dual-
income household and 6 months to a year if you are a single-income household.

Max out your retirement accounts. You have until the tax filing date next spring to make a 2020 contribution to an individual retirement account (IRA), but 401(k) and 403(b) contributions are deductible only when made in the same calendar year. The 2020 contribution limit is $19,500 for 401(k)s and 403(b)s and $6000 for IRAs. If you are over age 50, catch-up contributions may be available as well.

Use the remaining money in your flexible spending accounts (FSAs). If you still have money set aside in an FSA for health care or dependent care expenses, try to use those funds before the end of the year, or you’ll risk forfeiting the money. Some employers offer a grace period into the spring of the following year or a $500 FSA carry-over from one year to the next, but most do not.

Make contributions to your children’s 529 accounts. College costs continue to rise, and it is important to start saving early if you hope to reach your college funding goals. Additionally, some states offer a state income tax deduction if you are a resident and contribute to their 529 plan. In some cases, the tax savings can be substantial.

Designate individuals to whom you wish to gift assets. The annual gift tax exclusion is $15,000 for 2020 ($30,000 for married couples). You can gift this amount to as many individuals as you would like without having to pay gift tax or have it count against your lifetime gift and estate tax exemption.

Make charitable donations. Giving to charity can be a very powerful tax-savings tool. Check whether you have any appreciated investment assets that you could gift instead of cash. This way, you will avoid paying capital gains tax on those investments, and you get to claim a deduction for the full value of the donated asset. When the charitable organization sells it, there’s no tax to them. Be aware, however, that under the current tax law, you may need to donate a substantial amount of assets to be eligible to claim a charitable deduction on your tax return.

Harvest investment losses. The markets have certainly fluctuated a lot this year. If you own stocks and other marketable securities that have lost money in taxable accounts like individual or joint accounts, consider selling those investments to capture the loss. The losses can be used to cancel out taxable gains elsewhere or potentially lower your 2020 tax bill. If your losses exceed your gains, you will have a net capital loss. You can deduct up to $3000 of net capital loss (or $1500 if you are married and file separately) against ordinary income, including your salary, self-employment income, and interest income. Any excess net capital loss is carried forward to future years and puts you in a position for tax savings in 2021 and beyond.

Update beneficiaries. If you have had a major change in your personal life, such as a recent marriage or divorce, the birth or adoption of a child, or a death in the family, you may need to revise the beneficiaries on your retirement accounts and life insurance policies. You may also need to update your will and power of attorney documents.

These are just a handful of financial issues to consider as you approach year-end. Your financial and legal advisers can run through a more comprehensive checklist of planning options based on your personal circumstances.

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