Financial Planning Tips for December 31, 2019

The end of the year is almost upon us. While the CPAs at Naden/Lean are preparing for tax season, our clients and their families can use this time to wrap up financial loose ends. Some items on this list are obvious and most taxpayers know to look out for them, like charitable contributions and maxing out retirement plan contributions before year-end. Other items are just as important but tend to receive less attention. Here are xx ways to prepare for the end of the year financially, and what to do before 12/31.

Maximize Contributions

Some taxpayers who are on the cusp of a higher tax bracket or looking for ways to offset taxable income in 2019 can do so through strategic contributions. There are several areas where taxpayers can adjust their overall taxable income by contributing extra before December 31.

Charitable contributions are the first and most obvious option, but not for taxpayers who won’t receive a benefit to itemizing. For others, bundling charitable contributions is one way to achieve a lower taxable income while retaining the ability to itemize.

Employer-sponsored retirement plan contributions are another common tax-saving tool to utilize before year-end. Recall that 2019 limits are $19,000 for 401(k)s (reflects the total contribution limit across any and all 401(k) accounts) with a $6,000 catch-up contribution for taxpayers age 50 and older. IRA contributions are limited to $6,000, with a $1,000 catch-up for ages 50 and above. These numbers do not count toward the $19,000 total.

Taxpayers also have until December 31 for a Roth IRA conversion. Converting from a traditional to Roth IRA, whether fully or partially, creates a tax-free income in retirement or for estate planning. While tax rates are lower, and especially if the taxpayer’s tax bracket is lower than it will be in 2020, now is a good time to convert assets.

$15,000 gift exclusions are effective ways to reduce estate tax exposure while also benefiting beneficiaries. These annual exclusion gifts can go to an unlimited number of beneficiaries and will not decrease the lifetime estate tax exclusion amount and are not subject to the estate tax. Though federal estate tax thresholds will remain at all-time highs through 2026, it’s worthwhile to examine ways to lower the overall estate tax burden one year at a time, as large estates can often take time to transfer and plan for.

Gifts to children’s or relative’s 529 college accounts is also considered non-taxable.

Optimize Taxes

Two of the easiest ways to know how and when to optimize taxes are to conduct a withholding assessment and multi-year tax projection. The first method will indicate if you are significantly higher or lower than the amount of estimated taxes you’re required to pay in 2019, which affects short-term tax planning. Multi-year tax projections, on the other hand, will help to inform taxpayers of future tax obligations and opportunities, especially as family and business situations change.

Beyond that, here are a few ways to optimize taxes before year-end.

Required minimum distribution (RMD) thresholds must be met by December 31 for taxpayers age 70 ½ and above. Recall that RMDs apply to traditional 401(k)s and IRAs, but exclude Roth IRAs. Failing to withdraw the minimum RMD at the end of each year will result in a 50 percent penalty on amounts you did withdraw. If you don’t need the money, consider a charitable contribution strategy.

Capital gains distributions are made at the end of each year, and taxpayers may end up owing taxes on them that weren’t planned for. To prevent a costly oversight, monitor capital gains distributions, where funds are managed (as some funds don’t have a capital gains liability), and talk with your CPA if the taxes will be significant.

Tax loss harvesting is one way to use losses to offset current year liability, which could be helpful if there are capital gains taxes or other situations driving up the taxable income this year. There is a December 31 deadline to sell off investment income for either short- or long-term gains. Up to $3,000 of leftover losses can be used to offset other gains, including ordinary income and taxable interest.

Self-employed taxpayers have until December 31 to set up retirement accounts for themselves or employees. Some plans should be set up in 2019 but don’t have to be funded until later in 2020, while still retaining the tax benefits in 2019. Check out our list of retirement plans that self-employed individuals may want to consider.

Beyond the deadline-oriented financial planning tips mentioned above, December is a good time to look at your individual and family life insurance policies. Ensure that coverage meets your current needs; often, life insurance is purchased but not revisited, and as families change, sometimes coverage can become outdated. The same holds true for property, casualty, health, and long-term care insurance policies. Finally, now is a good time to review the beneficiaries on life insurance and retirement accounts.

Clients with questions on how to settle their finances before year-end should reach out to their CPA or accountant at Naden/Lean for guidance.