2020 is almost over!
At the end of the year, it's a good time to reflect on what happened, what didn't happen, and how you felt about it all. That way you can also embrace what you loved and release what felt heavy.
It's important to also do this with your finances. So, for my last post of 2020, I would like to share an interview and Q&A between Hannah Moore and a few of my clients that I recorded earlier this month.
As a financial planner, she is dedicated to helping clients understand their money in a new way. She's also committed to supporting the next generation of planners to ensure the profession moves forward to meet the needs of a new generation, including me!
The end of the year is, of course, a good time to check on your financial accounts. The last day of December is sometimes a significant deadline so it can make sense to do some year-end housekeeping, including evaluating tax strategies and making plans for the coming year. Here are 3 tips written by Fidelity, which I've edited for more clarity and to eliminate any fluff. Click here for the unedited version.
1. Do a financial checkup
The best place to start is with your latest paystub and see how your year-to-date column is shaping up. You may be out of whack with the amount of taxes you have paid so far, and if so you can adjust your tax withholding before the end of the year. The same goes if you have a bonus on the way: Those are typically only withheld at 22%, so if you are in a higher bracket overall, you may owe an additional amount you aren’t expecting. You also may be off-target for your retirement account contributions for the year.
Tip: Don’t forget: If you are over 50, you can make catch-up contributions of an additional $6,500 to 401(k)s and other qualified workplace retirement plans until December 31.
To maximize your tax advantages, and assuming it’s appropriate for your goals, you can consider a contribution to a 529 educational savings account or a health savings account (HSA), both of which are due by December 31. You could also contribute to a traditional or Roth IRA for 2020, if you qualify, but those contributions can be made through April 15, 2021.
2. Harvest and rebalance
If you have realized capital gains in taxable accounts during the year, you may want to look at tax-loss harvesting, which is selling positions at a loss to offset those gains, plus up to $3,000 in taxable ordinary income annually.
However, the tax benefits of this may not outweigh the potential growth of your holdings right now, so consider your options carefully. “This year in particular, you don’t want to let taxes rule your decisions. Do you really want to sell something that’s down now just for tax purposes and lose out on the potential market upside?” asks Christopher Williams, principal at EY Private Client Services.
For both your taxable and tax-deferred accounts, you may want to look at rebalancing if your positions are no longer aligned to your long-term goals. Above all, look at whether your asset mix is where you want it.
If you are a high earner, and particularly if you live in a high tax state like New York or California, you may want to look at municipal bonds. Interest from tax-exempt municipal bonds is generally free from federal income taxes, and in some cases state and local income taxes as well.
Tip: You may want to avoid buying a mutual fund right before it makes its year-end distribution, or you may have an unexpected tax bill.
3. Make a giving plan
In the midst of a global crisis, charitable giving will be a major focus at the end of the year. The CARES Act for COVID-19 relief provides a $300 deduction from income for charitable giving on the 2020 income tax return, regardless of whether you take the standard deduction or itemize. If you plan to give more generously than that, you may want to consider ways to make use of existing tax advantages, especially if you think your income tax rate may go up in the future.
If you’d need more than your usual charitable contribution in order to exceed the standard deduction, consider "bunching." That means concentrating charitable contributions into a single year, then skipping them for a few years. The catch is that this strategy requires having the financial capacity to pack all your deductions into one year.
Tip: Donating highly appreciated assets that you’ve held more than a year helps you avoid capital gains taxes.
Let me or Hannah know if you have any personal financial questions!
With Love & Gratitude,