Your 2020 Year-End Planning Checklist

While you might be ready to ring in 2021 after this most unusual year, we would like to provide you with a checklist to review before the 2020 tax year comes to an end. Rather than touch on all aspects of your financial planning you might revisit annually, this checklist will focus on income tax and health care planning items that are time-sensitive due to their December 31 or April 15 deadlines. Between the SECURE Act passed in December 2019 and the CARES Act passed in March 2020, you have most likely been in touch with your CPA this year.  We suggest continuing to work with your CPA before making any significant changes to your strategy.

Gifts (Charitable and Individual)

• Consider “bunching” charitable contributions if you are itemizing your deductions (or are close to being able to do so) on your 2020 tax return. If you have gifts remaining for 2020, consider whether it is best to send cash or appreciated stock to your charity.
• The passing of the CARES Act eliminated the requirement to take a distribution from your IRA in 2020 (this would have been required if you were over age 70½ by 12/31/2019, or age 72 this year). While you can still make gifts to charity directly from your traditional IRA, if you are over age 70½, check with your CPA before doing so.  If you are itemizing your deductions in 2020, it might make more sense to make contributions from your non-retirement accounts. See Reconsidering the Source of Your Charitable Contributions in 2020 for more details. If you would like to make a distribution from your IRA at Bragg, please let us know as soon as possible.  Our goal is to have distributions from IRAs completed before December. Reminder: Donor Advised Funds cannot be the recipient of a Qualified Charitable Distribution.
• Charities should receive your gift by 12/31/2020 for it to be counted on your 2020 tax return. If you are planning to gift stock from your taxable account at Bragg, we recommend initiating this request by the first week in December to allow plenty of time for the transfer to be processed and received. Our custodians cannot guarantee gifts of stock made after December 18 will arrive at the charity in 2020.
• The CARES Act allows for the following two changes in 2020 related to charitable gifts:
  • The CARES Act provides increased charitable tax incentives when contributing cash directly to charities (not a Donor Advised Fund).  It allows individuals who itemize their deductions to fully deduct cash charitable gifts up to 100% of their AGI in 2020. This is up from 60% previously. *Long-term Capital Gains assets used for contributions remain at 30% AGI limit.
  • If you don’t itemize your deductions, the CARES Act did add an allowable $300 above the line charitable deduction for cash contributions made directly to a 501c(3).
• The annual gift tax exclusion for gifts to individuals is $15,000 per person in 2020. This is a “use it or lose it” exclusion, so be sure to send gifts for receipt prior to 12/31/2020 if you intend to utilize this in 2020. Also, remember that assets gifted to individuals during your lifetime retain their original basis. Assets inherited at death receive a “step-up” in basis at death. (This could change if there is significant estate tax reform with another administration.) Consult your advisors to determine the best assets to give away during your lifetime.
• If you would like to make a gift to a 529 plan utilizing the 2020 annual gift tax exclusion amount, the gift must be deposited in enough time to be recorded on a 2020 statement.
• If you took a qualified distribution from a 529 plan this year, make sure the related qualified expenses are paid by 12/31/2020. For example, if you took a distribution from the 529 Plan to pay for textbooks, make sure you actually purchase those textbooks by year-end.

Taxes

Consider your year-to-date realized capital gains in your taxable accounts. Are you close to the thresholds described below? Or, has your CPA advised you to limit gains from your investment portfolio due to other income incurred this year?

• If your taxable income happens to fall under $80,000, filing jointly, or under $40,000, filing single, you might be able to take additional gains at a 0% rate.
• If your taxable income is above these limits, your long-term capital gains rate will be 15% until taxable income exceeds $496,600, filing jointly, or $441,450, filing single.

If you are a Bragg client, we have an Investment Policy Statement for you on file, where we discussed and decided upon an annual realized capital gain tolerance. Your portfolio manager watches this amount and works to stay below it all year. Mutual funds often make capital gain distributions in the fourth quarter. If you would like to know where your portfolio stands and what to expect, please don’t hesitate to call us to discuss. And, if you are not a client of Bragg, we recommend that you ask your Investment Advisor if they have a target on file for you and share this with your CPA.

• Tax Loss Harvesting—If you sell assets for tax loss harvesting (to offset gains) but want to maintain exposure to that asset, be sure you wait more than 30 days before re-purchasing the asset to avoid the wash-sale rule. 
• Did your CPA recommend that you pay quarterly estimated tax payments this year? If so, have you made them? If not, can additional withholding be taken from your paycheck or IRA distribution to allow for this oversight?  This can help you prevent an underpayment penalty. 
• Are you close to the MAGI** threshold of $200,000 (single) or $250,000 (married/joint)? Keep in mind this is where the additional 0.9% tax on earned income and 3.8% tax on net investment income starts. Consider deferring income recognition if possible. 
• If you are self-employed or have income from a small business (including income-producing real estate), you may be eligible for a Qualified Business Income (QBI) deduction.  Work closely with your CPA to determine if you might benefit.  

Retirement Plans

• IRA or Roth IRA contributions—Plan to make 2020 IRA contributions prior to 04/15/2021. Contribution limits are $6,000 per person (plus an additional $1,000 catch-up contribution if you are age 50 or older). See phase outs for eligibility.
• Remember: If your income level makes you ineligible to make direct Roth IRA contributions, you can still consider making “back door” contributions. Check with your advisor to determine what is best you. 
• Employer 401(k) and Other Retirement plans—Check your year-to-date contributions. Are you on track to maximize your allowable deferral to these plans?  Each employee can contribute $19,500 (plus an additional $6,500 catch-up contribution if you are age 50 or older) to an employer-sponsored elective deferral plan, like a 401(k). If you aren’t on track to maximize, can your cash flow allow for moving closer to this target over time? If you are already easily maximizing, there are ways to contribute additional funds on an after-tax basis. 
• Consider a Roth conversion if you are in a lower bracket today than anticipated in future years.   Read more about Roth IRAs.
• We would normally remind you to take your IRA RMD (required minimum distribution) at this point. But, the CARES Act gives you the year off from this requirement!  Collaborating with your CPA is recommended, as they may guide you to make estimated income tax payments in lieu of planned withholding from the IRA.

Health Care Accounts and Benefits

• If you have a Flexible Spending Account (FSA) through your employer, are you on track to use the balance by the required date according to your plan?  Remember: Any funds you don’t use, you will lose. 
• If you have a high-deductible health plan (HDHP), are you contributing a Health Savings Account (HSA)? Are you on track to maximize your savings this year? Unlike the FSA mentioned above, HSA balances don’t have to be spent down each year.
• Watch for your employer’s 2021 open enrollment for health care and other benefits, which often happens sometime in the fall. Be sure to review any changes and compare options to ensure you still have the right coverage for your circumstances. 
• If you have healthcare through ACA (Affordable Care Act), have you considered whether the income you reported to ACA is in line with your actual income expected by year-end? 
• If you are on Medicare (Part D), 2021 open enrollment dates are 10/15/2020 through 12/7/2020. Our partners at SHIIP (Seniors’ Health Insurance Information Project) have shown us how valuable it is to re-evaluate your prescription coverage. Check to make sure your prescriptions have not changed tiers and that the insurance company hasn’t changed pricing.
• The Medicare Part B premiums you will pay in 2022 will be based on your 2020 Modified Adjusted Gross Income, or MAGI**.  While we don’t have the 2021 rates yet, the following table shows the 2020 rates based on 2018 MAGI ranges. Are you close to an increase in premium level based on the ranges shown below? If so, consider whether delaying income to 2021 is a viable option. 

As we mentioned, this is not meant to be an exhaustive list of all items to consider, yet a list of the most common tax items (and a few health care items) that may be within your control. Please reach out to us at Bragg with any questions or if you would like to discuss further.  We also advise that you work with your CPA to run tax projections before implementing any significant changes. If you would like a more comprehensive list of questions to consider regarding your overall financial health and planning, please see the article Financial Planning 101.

Definitions:

*AGI (line 8b on your 2019 Form 1040) is gross income less certain adjustments. AGI includes all taxable income, including wages, bonuses, self-employment income, taxable interest, dividends, capital gains, retirement distributions, annuities, rents and royalties, taxable social security income, alimony received (with agreement prior to 2019), etc.  The most common adjustments that reduce your AGI include one half of self-employment tax paid, alimony paid (with agreements prior to 2019), pre-tax retirement/HSA plan contributions, student loan interest, and certain losses. Back to top

**MAGI then adds back to your AGI certain deductions from above. Back to top

***Taxable Income (line 11b on your 2019 Form 1040) is AGI less Deductions (Standard or Itemized). Back to top

Disclaimer: We are happy to share these ideas with you. Please know we do not practice law and we are not attorneys. We are happy to partner with you and your attorneys to help you accomplish your goals.