Year-End Financial Planning You Should Be Doing Now
By David K. Little, CFP®, CFA
Some people are still writing 2018 on their checks, but the end of 2019 is upon us. Time to start thinking about holiday meals, Christmas shopping, time with family, and year-end financial planning.
That last item might be at the bottom of your list, but the end of the year is always a good time to make sure your financial house is in order and to see if there’s anything you need to adjust before the calendar rolls over.
Here are a few ideas you can use. Be forewarned: There’s an excessive number of acronyms in the article below.
Charitable Giving
Your mailbox is probably starting to fill up with appeals from nonprofits that would like you to contribute money before year-end. Here are some things to think about as you make decisions on how to make those contributions.
First, with the change in tax laws at the beginning of last year, most people don’t get to itemize their deductions anymore, which means that many charitable contributions don’t help reduce your taxes. We’ve been helping our clients preserve the deduction by using part of the required minimum distributions from their IRA to fund charitable gifts. This is called a qualified charitable distribution, or QCD.
Giving money to charity this way is almost always helpful if it works for you. You need to be over 70 ½ and taking required distributions from your IRA, but as long as you’re in that situation, it’s better to give money to charity this way than to write checks to the charity out of your checking account.
There are other potential benefits involved with QCDs. Because the money that goes to the charity never gets reported as income, it reduces your adjusted gross income (AGI).
Lowering AGI can potentially help reduce or eliminate that nasty “tax” that the government euphemistically calls an “income-related monthly adjustment amount,” or IRMAA for short. The IRMAA applies to people the government considers high earners and can effectively double or even triple your Medicare cost.
There are other items on your tax return that have to reach a percentage of your AGI to be deductible (like medical expenses, for example). Using QCDs to do your charitable giving makes it easier to climb over this floor to possibly take advantage of a medical tax deduction.
A second way to make more tax-efficient gifts is to give appreciated assets to charity, instead of giving cash. If you own a stock (let’s use Apple as an example) that’s gone up substantially since you bought it, giving it away and rebuying it with the cash you would otherwise have given to a charity increases your basis in the stock you’ll continue to own.
Here’s how that can work:
Assume you own Apple stock worth $30,000, for which you paid $10,000.
You want to make a $30,000 donation to the Salvation Army.
You can either write them a check or give the shares of Apple to them.
Our advice in this case would be to give away the Apple shares and then take the $30,000 from your checking account and buy $30,000 of Apple stock.
Your tax deduction will be the same either way, but you’ll end up owning stock with a $30,000 basis, instead of stock with a $10,000 basis and a $20,000 gain that you might eventually pay tax on.
A related approach would be to give the Apple stock to a donor-advised fund, or DAF. These funds allow you to transfer shares into them and immediately get a tax deduction.
The kicker is that you don’t have to distribute the money out of the DAF to charities until you want to do that. So, you can fund the DAF with a relatively large donation and then take as long as you want to parcel it out to your charities of choice.
Last, but not least, on the charitable deduction front is the strategy of “bunching” your donations. Because of that higher standard deduction mentioned earlier, many taxpayers can get to the point of itemizing their deductions only if they bunch two years’ worth of deductions into one year.
If you start this strategy with a double donation in 2019, you’ll make no donations in 2020, then another double donation in 2021. We’ve paired this strategy with a donor-advised fund so that you can continue giving money to your charities consistently out of the DAF, but the tax-deductible donation you make is only to the DAF every other year.
Other Tax Planning
Portfolio Losses
The end of the year is always a good time to look at your portfolio to see if there are any losers you can sell to offset your winning investments. Even in a year as good as 2019 has been for the stock market, you might be carrying stocks or other investments that have gone down in value since you bought them.
We always like to look at the silver lining of the dark cloud and use those losses to our clients' advantage. If, by some chance, you have more losses than you can use in the current year, you can “bank” those losses and use them to offset future gains. They carry forward forever.
Retirement Plans
There are some year-end deadlines related to retirement plans that might help your tax situation. Specifically, 401(k) plans need to be set up before the end of the year, even though they don’t need to be funded until your tax deadline arrives.
So, if you’re self-employed and have had a good year financially, you should consider setting up some kind of plan to shelter some of the profit you have. Our go-to choice here is typically 401(k)s. They offer the ability to shelter a large amount of profit, and yet they’re inexpensive and flexible in their requirements.
Eclectic Associates is a fee-only fiduciary financial advisor in Fullerton, California. Feel free to call us if you have any questions related to the points raised above. We’d be happy to talk to you to see if we can help with your situation.
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