Wealth Planning

Key Year-End Planning Considerations


By Jody R. King, JD, CPA

Vice President & Director of Financial Planning

2020 Year-End Planning

November 12, 2019

The more things change, the more they stay the same. The approach of year-end presents another opportunity to reassess your tax and financial circumstances, maximize your employment benefits, and generally take control of your finances. Below, you’ll find 12 year-end planning tips to consider over the next few weeks:

1. Recognizing Losses and Taking Gains

Year-end is an opportune time to consider revisiting your capital gains budget for the year, especially in light of the equity markets’ success over the past few years and recent volatility. If your portfolio contains unrealized losses, it may make sense to recognize some of those losses to decrease your overall current-year capital gains tax burden. Recognizing capital losses to offset recognized capital gains, referred to as “loss harvesting,” is an important strategy to consider at year-end.

Your portfolio may include positions that have embedded capital losses, but continue to be good long-term investments. If you are considering selling those holdings now in order to recognize capital losses, you must observe a 30-day window between purchase and sale activity in order to recognize the loss. Complexities such as this demonstrate that it is important to consult your tax and investment advisors to ensure that you follow the required rules and maintain the appropriate market exposures when executing loss harvesting.

2. Itemized Deductions or the Standard Deduction

One likely result of the 2017 Tax Cuts and Jobs Act (the Act) is that fewer couples will itemize deductions on their individual income tax returns. This is the result of changes to both the standard deduction and to the itemized deduction rules. The 2019 standard deduction is $24,400 for a couple that is married filing jointly, $18,350 for head-of-household, and $12,200 for individuals. In order to itemize deductions, allowable deductions must exceed the standard deduction amounts.

Now that the deduction for state and local income and real estate taxes is limited to $10,000, the additional amount to reach the threshold can be a combination of deductible medical, charitable, and mortgage interest amounts. Remember that home equity interest is only deductible if the loan proceeds were used for residential acquisition or capital improvements, and are subject to the overall home loan debt limit of $750,000 for residential debt incurred after December 15, 2017, and $1 million for pre-existing debt. The threshold for deducting medical expenses returned to 10% of Adjusted Gross Income (AGI) for 2019.

The New Tax Law: Wealth Planning Considerations

3. Philanthropy

If you are charitably inclined, consider making any charitable gifts before year-end, especially if you will be able to itemize deductions. If you are itemizing this year but may not be in future years, consider “gift bunching” by accelerating what would be your 2020 or later years’ charitable gifts to 2019. If you are not ready to have the amounts gifted pass to charities immediately, you could also consider contributing to a donor-advised fund, which may allow you to receive the current-year tax deduction while retaining the ability to request that the donated funds be distributed to qualified charities during future years.

Learn More: Minimizing Taxes with Charitable Gift Bunching
Learn More: Fiduciary Trust’s Donor-Advised Fund Program

Donations of appreciated securities held for more than one year continue to be a tax-advantaged way to make charitable gifts. As always, it is important to consider the various AGI percentage limitations that apply to the charitable deduction in planning your charitable giving.

If you are over age 70½, have not taken the required minimum distribution (RMD) from your individual retirement account (IRA), and have charitable goals, consider making gifts directly to qualified charities (but not to donor-advised funds) from your IRA. Charitable gifts from an IRA of up to $100,000 per year will count as a Qualified Charitable Distribution (QCD), fulfilling your RMD without causing the recognition of ordinary income.

4. Tax Projections and Estimated Tax Payments

Review your 2019 income and itemized deductions to be sure you have paid in sufficient amounts, either through withholdings, estimated tax payments, or prior year refunds carried forward, to avoid tax penalties. If you are planning to make estimated tax payments, the fourth quarter 2019 payments are due on or before January 15, 2020.

5. Fully Fund Your 401(k)

While working, it is advisable to fully fund your 401(k) or a similar retirement plan each year. Doing so will benefit you in the long run by maximizing retirement savings that grow either tax-deferred or tax-free and may help decrease your current tax liability. Even if your cash flow will not allow you to fully fund your plan, making contributions to at least maximize any available employer matching program is compelling. Maximum 401(k) contribution limits will be increasing from $19,000 in 2019 to $19,500 in 2020, with those who are over age 50 allowed to contribute an additional $6,000 in 2019 and $6,500 in 2020. Depending on your situation, you may want to consider taking advantage of a Roth 401(k) feature if offered by your employer. Utilizing a Roth 401(k) will likely result in higher current income taxes, but will provide you with tax-free, as compared to tax-deferred, appreciation on any retirement savings put into your Roth 401(k).

If you do not have a 401(k) or are already fully funding your 401(k), also consider funding an IRA. The $6,000 IRA contribution limit for 2019 is expected to stay the same for 2020, with an additional $1,000 contribution allowed in both years for those over age 50 by year-end. A non-working spouse with an employed partner can also fund their own IRA, subject to taxable compensation requirements.

If you are eligible, consider funding a Roth IRA instead of a traditional IRA. Roth IRAs grow tax-free and are not subject to RMDs, compared to traditional IRAs that grow tax-deferred and are subject to RMDs once you reach age 70½. Please note that all 2019 traditional IRA and Roth IRA contributions must be made by April 15, 2020.

6. Roth Conversions

Although it may never seem like an appropriate time to pay additional ordinary income taxes, paying taxes currently to convert all or part of your traditional IRA or previous-employer 401(k) accounts to a Roth IRA is something to consider. In exchange for paying taxes today on amounts converted, Roth IRA assets grow tax-free and are not subject to RMDs during your lifetime. Over an extended period of time this benefit can be significant. A Roth IRA also creates an income tax-free asset that can pass to heirs if the assets are not needed during your lifetime. If you are taking advantage of a Roth 401(k), you should consider at least a minimally funded Roth IRA conversion to start the five-year clock that can allow access to the tax-free growth. Year-end is an excellent time to review your projected ordinary income for the year and understand the projected tax impact of any conversions based on where your actual taxable income is projected to fall within the marginal tax brackets structure. Please note that Roth conversions can no longer be recharacterized, or reversed, once completed.

7. Annual Exclusion Gifts

If you have sufficient assets, and if transferring wealth to the next generation is a goal in your overall wealth plan, you should consider making annual exclusion gifts before year-end. Annual exclusion gifts can be a powerful wealth transfer technique over time. Each calendar year an individual can give up to $15,000 to as many individuals as he or she chooses without utilizing any of his or her lifetime gift and estate tax exemption amount (currently $11.4 million.) That $15,000 increases to $30,000 for married couples who either make separate gifts or choose to “gift split.”

Contributions to a family member’s Section 529 Plan for education can be made with annual exclusion gifts. In fact, you can front load a 529 Plan and elect to spread the gift ratably over a five-year period when you file your gift tax return. If you have a 529 Plan and have incurred unreimbursed qualified educational expenses, you should request reimbursement from the plan before the end of the year. Also recall that beginning in 2018, up to $10,000 of elementary and secondary school tuition costs can be reimbursed from a 529 Plan each calendar year.

Learn More: Paying for College

In addition to the annual exclusion gifts noted above, an individual can also pay tuition expenses and qualified medical expenses directly to the institutions without creating a taxable gift. Tuition includes the cost of education from preschool through graduate school, but does not include non-tuition charges such as room and board or books. Qualified medical expenses include health insurance premiums.

8. Gifting Beyond Annual Exclusion Gifts

If you have significant assets, you should establish a comprehensive wealth transfer plan that incorporates asset transfers both during your lifetime and at your death. This plan can include gifting to family members as well as your philanthropic interests. If you plan to eventually transfer assets into irrevocable trusts, now may be an appropriate time to begin working with your advisors to draft a well thought out trust with appropriate parties named as trustees. The current $11.4 million lifetime gift and estate tax exemption includes $5.7 million of basic exemption and $5.7 million of “bonus” exemption, with the “bonus” portion scheduled to sunset on December 31, 2025. Because Congress could conceivably change these higher limits at any point, it makes sense to establish a wealth-transfer plan, even if you choose not to execute it immediately, so that you are ready to move forward quickly if it does appear the laws are likely to change.

9. Health Plan and Other Elections

The open enrollment period for Medicare plans, as well as that for most employer-based benefits, often occurs during the last few months of a calendar year. Taking a moment to make sure your current elections are your best options for next year can be time well spent.

10. Health Savings and Flexible Spending Accounts

If you have a high-deductible health insurance plan, make sure you are fully funding your Health Savings Account (HSA) if you are able. Funds put aside in an HSA do not need to be spent in that calendar year, but can instead be invested and used for future medical expenses. The HSA limit for 2020 is $3,550 for individuals (a $50 increase from 2019) and $7,100 for families (a $100 increase from 2019). If you are over age 55, you can contribute an additional $1,000 whether for an individual or family HSA. (Please note that if an individual is over age 65 and enrolled in any part of Medicare, he or she is not eligible to contribute to an HSA.)

In addition to making contribution elections for 2020 for either Health and/or Dependent Care Flexible Spending Accounts (FSAs), you should review the funds remaining in your FSA account and submit the necessary receipts for qualifying reimbursable expenses. Some plans allow you to carry balances forward to the new calendar year for future expenses, but others do not. Amounts remaining beyond the allowable carryforwards will likely be forfeited, so it is important to properly manage both the use of funds currently in your FSA as well as elections for future contributions. Maximum contributions to a Health Care FSA and Dependent Care FSA for 2020 are $2,750 and $5,000, respectively. If you have an HSA, please also make sure your Health Care FSA is HSA-compatible. An HSA-compatible Health Care FSA will generally limit reimbursement to items related to dental or vision expenses.

11. Estate Planning Documents and Beneficiary Designations

Year-end is also a good time to review your estate planning documents, including your will, revocable trust, healthcare proxy, and durable power of attorney, to be sure that the trusted parties named in the documents are still appropriate to serve and that the document terms reflect your current wishes. In addition, it is a good time to review your beneficiary designations to make sure any IRA, 401(k), or insurance policies name your recipients of choice. It is also recommended that you request inforce illustrations for any permanent life insurance products that you may own, so you can review the financial health of your policies.

Learn More: Trust and Estate Insights

12. Financial Checkup

Most families are not fully aware of how much they spend. Year-end is an excellent time to review annual credit card, bank, and other statements in order to understand your current spending and assess how that fits in with your overall financial health. We find that our clients benefit from working with us to establish a financial plan. This is a good opportunity to gather information to facilitate the preparation of a financial plan, with the goal of creating a basis from which you can make informed decisions.

As you consider your year-end tax and financial planning, we encourage you to consult with your tax advisor to review the specifics of your situation. As always, you should also feel free to discuss these planning opportunities with your Fiduciary Trust officer. Please contact us if you would like to be introduced to one of our officers.

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Disclosure: The opinions expressed in this article are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute investment, legal, tax, or accounting advice and clients should discuss any proposed arrangement or transaction with their legal or tax advisors.

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