Perhaps you’ve done the same and started scribbling down what’s already on the books for the coming year.
The glimmers of hope for 2021 are flickering in the gloaming.
But before you set aside your dog-eared 2020 calendar, there are a few pieces of business to attend to when it comes to your financial health and wealth. Here are 10 moves to make before year-end.
Review your retirement accounts and investment portfolio. Last night, our financial adviser emailed my husband and me with our year-end review attached. She wrote: “Let me know if you want to set up a time to go over it. Hope you’re both staying sane and healthy!”
We do. We set up a meeting for later this week. And, so far, we’re in good shape.
It’s been a year of market unpredictability from soaring highs to the lows of the lows. And you’ve made it through. Now is a good time to take a look under the hood. You might do this alongside your financial adviser via a phone call, as we will, or by a virtual screen chat.
Have that ‘test your mettle’ talk. See if there is some rebalancing you might do to prepare for next year’s potential volatility, if that’s likely to make you uneasy, or if you might be nearing retirement. Keep in mind that a diversified portfolio with a mix of equities and fixed-income investments aligned with your risk tolerance goes a long way to providing ballast and inner calm in market swings.
Reduce taxes on 2020 stock gains. If you sold investments that had gains during the year, you’ll pay taxes on those profits. To reduce the tax impact, you might consider selling other investments that dropped in value, provided you aren’t keen on holding on to them for a possible bounce back.
Consider possible changes in tax law. If you’re anxious about higher tax rates in the year ahead, there are some other steps you might contemplate. President-elect Biden’s campaign pledge was not to increase taxes on those making less than $400,000. But if your income tops that amount, and you have flexibility about when income is received, you might want to deliberate on whether to fast-track income this year, for example, by exercising stock options, or receiving a scheduled bonus before year-end.
Evaluate your estate planning. This one is not easy to turn on a dime, but might get you thinking at any rate. There’s some discussion that the estate tax exemption could go down in the new administration.
Normally, when you die, your estate is not subject to the federal estate tax if the value of your estate is below the exemption amount. For people who pass away in 2021, the exemption amount will be $11.7 million (it’s $11.58 million for 2020). For a married couple, that comes to a combined exemption of $23.4 million.
President-elect Biden has proposed returning estate tax levels to “historical norms.” This could mean that the estate tax exemption amount could be reduced to $3.5 million ($7 million per married couple), the gift tax exemption amount could be reduced to $1 million ($2 million per married couple), and the top gift and estate tax rate could be increased to 45% from 40%.
You might ask your adviser on whether you should be making gifts, or setting up trusts for children.
Take advantage of charitable giving. You may be able to claim charitable contributions for 2020 if you’ll have write-offs exceeding the standard deduction ($12,400 for singles; $24,800 for married couples filing jointly).
Under the CARES Act, part of the federal government’s pandemic relief program that passed in March, individual taxpayers who itemize in 2020 can deduct cash charitable contributions made to certain qualifying charities of as much as 100% of their adjusted gross income, up from 60%.
Taxpayers can also take a deduction of up to $300 for cash donations made in 2020 when they file their tax return in the spring, even if you don’t itemize on your income tax return. The deduction is taken “above the line,” it reduces, by up to $300, your adjusted gross income.
To qualify for the deduction, the donation must be made in cash—giving by check or credit card is fine. The contribution must be made to a qualified, 501(c) (3) public charity. The IRS offers a search tool to check if your donation is tax-deductible.
If you’re betting that your income tax will go up next year, you might push charitable giving into 2021, so you can get the most benefit from the deduction. A good way to do that, is set up a donor-advised fund for your philanthropic giving to provide you time to make specific gifting choices.
You can find more information about the rules and limits for itemizing charitable donations at irs.gov.
Consider ramping up unreimbursed medical expenses. In 2020, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. There’s still a little time to schedule appointments and procedures that will increase the amount of your deductible expenses.
The IRS allows you to deduct payments for insurance premiums you paid for policies that cover medical care or for a qualified long-term care insurance policy, dental and vision care as qualifying medical outlays. Payments for false teeth, reading or prescription eyeglasses, contact lenses, hearing aids, crutches are also deductible. And the IRS lets you deduct the expenses that you pay to travel for medical care, for example, mileage on your car, bus fare and parking fees.
Max out your Health Savings Account (HSA) if you have one. Health savings accounts let you put money aside for future qualifying health expenses, tax-free, if you have a high deductible health plan. Distributions for qualified health expenses are tax-free, too.
For 2020, the maximum HSA contribution for individuals is $3,550 and it’s $7,100 for family coverage; people 55 and older can contribute an additional $1,000.
Review your tax-free health care Flexible Spending Account (FSA) if you have one. Unlike an HSA, most FSAs are “use it or lose it.” That means any funds left hanging after Dec. 31 are forfeited. So tap the funds to pay for out-of-pocket medical expenses such as eyeglasses, contacts or even hearing aids.
If you’re self-employed, consider setting up a solo 401 (k) plan. To make contributions for 2020, you must establish the plan by Dec. 31.
Create a 2021 spending budget. When it comes to future financial stability, spending is the easiest move of all to get a grip on.
Write down your regular fixed outlays, such as your mortgage or rent expense, health insurance premiums, utilities and so on. Your 2020 expenditures can offer a guide. You might even notice some spending from this year that you can pare back.
Then review those expenses that will be for 2021 only, perhaps a wedding gift or two, a home remodel project, an educational expense, or, gasp, a vacation getaway, when it’s safe, of course, to venture forth.
St. Barts, you’re on my mind.
Kerry Hannon is a leading expert and strategist on work and jobs, entrepreneurship, personal finance and retirement. Kerry is the author of more than a dozen books, including Great Pajama Jobs: Your Complete Guide to Working From Home, Never Too Old To Get Rich: The Entrepreneurs Guide To Starting a Business Mid-Life, Great Jobs for Everyone 50+, and Money Confidence. Follow her on Twitter @kerryhannon.