Written by: Katie Fischer, CFP®
A year that will definitely be remembered by all of us is coming to an end. 2020 brought new challenges to most of us as we learned how to stay healthy and adapt our lifestyles to a socially distant world. One thing that 2020 did not change was the need to complete some year-end financial tasks to set yourself up for success when the new year does finally arrive.
Here are a few financial tasks to check off your to-do list before December 31st.
1. Fund a 529 Plan for Loved Ones
The 529 plan is one of the best ways to save for future education expenses and in the state of Indiana you receive an extra tax credit for making contributions. If you are an Indiana resident and make contributions of $5,000 to the Indiana CollegeChoice529 plan, then you will receive a tax credit of $1,000 when you file your Indiana tax return. Unlike an IRA or Roth IRA (which allow contributions until April 15th of the following year), these contributions must be made prior to December 31st to receive the tax credit for 2020. So, if you would like to support yourself or someone else’s future education expenses, consider making these contributions now.
2. Make Your Charitable Contributions
I have personally witnessed the hardships that have been placed on non-profit organizations this year through my own volunteer efforts. Not only did shutdowns cause volunteers to cut their time or even quit serving all together, but in-person fundraisers were canceled, and formerly reliable donors found themselves unable to continue at their former contribution levels. Many of these organizations are trying to do more with less but are struggling to meet the needs of their communities.
The CARES Act included a provision allowing a 2020 tax deduction for up to $300 in charitable contributions for taxpayers. This deduction is considered above-the-line, meaning that even if you do not itemize your deductions for 2020 you can still take advantage of this deduction. If you have the means, make sure you make contributions before the end of the year to take advantage of this one-time opportunity.
3. Take Qualified Charitable Distributions (QCDs) from Your IRA
While the CARES Act eliminated Required Minimum Distributions (RMDs) for 2020, you still have the opportunity to make a QCD this year. In order to be eligible for a QCD, you must be over age 70.5 and have a pre-tax retirement account. If you qualify, you can transfer assets directly from your IRA to a qualified charity without paying taxes on the amount transferred. It is important that the process is completed properly. Otherwise, you could end up with additional taxable income. Be sure to talk to your advisor to help you complete a QCD.
4. Spend Your Flexible Savings Account (FSA)
If you are employed and you contribute to either a dependent care or healthcare FSA (or both), make sure you use all of the dollars in those accounts prior to year-end. FSAs are a great way to access tax-free money to help pay for necessary expenses, but if you don’t use the money in the accounts by the end of the year you lose it. If you have money remaining in a healthcare FSA, then it may be time to schedule a check-up prior to December 31st or order a new pair of glasses. If you still have funds in a dependent care FSA, then make sure you have reimbursed yourself for all eligible expenses and check if your employer provides a grace period to use some of the funds in early 2021.
5. Consider Harvesting Capital Gains or Losses
Depending on how your taxable income has been affected this year, you may have an opportunity to take advantage of lower tax rates than you will have in the future. If you saw a decrease in your income this year, then it may be a good time to work with your financial planner and tax professional to review tax projections and potentially sell some investments with long-term capital gains to take advantage of potentially lower tax rates. On the other hand, maybe you sold assets this year which resulted in capital gains and it now makes sense to sell some assets at a loss to offset the tax impact of those gains. We call this capital loss harvesting and monitor our clients’ accounts for these opportunities throughout the year.
6. Set Yourself up for a Successful 2021
Finally, one financial task that everyone should be doing at the end of each year is revisiting your budget, goals, and plans for the new year. Review your 2020 spending (there is a good chance that you saw changes to your budget this year) and figure out where you want to make adjustments for 2021. We know that next year will begin with continued social distancing. Does that change your short-term goals? Is the disruption we have seen in our formerly “normal” lives a good opportunity for you to alter your long-term financial plans?
While 2020 may not have been what any of us expected when the clock struck midnight on January 1st, there are many financial aspects that continue to need our attention. There are several tasks that you can complete before year-end to set yourself up for success in 2021.
Related: 4 Ways To Save on Taxes