Final Year-End Financial Steps

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As we approach the holiday season once again, just about all of us will soon be putting a little extra pressure on our wallets — purchasing gifts, enjoying festive nights out and traveling to visit family and friends. And why not? After working hard all year, we want to spend some of our hard-earned money and share it with those we love.

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But it also makes sense before Dec. 31 to evaluate your overall financial situation. Here are six actions I recommend taking that could save you plenty of tax dollars and improve your financial well-being:

Empty Out Your Flexible Spending Account.

Many people have a Flexible Spending Account (FSA) to cover certain out-of-pocket medical, dental and vision expenses. While contributions to these special accounts provide a tax deduction, there is a catch: These funds are subject to the “use-it-or-lose-it” rule. So, it’s important to spend any remaining money in this account before you lose it, typically by Dec. 31.

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Make sure to find out whether your company offers a grace period into 2020 to spend FSA funds. Some companies will allow employees to spend money in their 2019 account through March 15, 2020. If not, make sure you find the time for a last-minute run to the pharmacy, dentist or optometrist. (For more ideas, see Last-Minute Ways to Spend Down Your Flexible Spending Account.)

Maximize Retirement Plan Contributions.

There may be no better way to save than using tax-deferred retirement accounts. If you have an employer-sponsored retirement plan such as a 401(k) or 403(b), challenge yourself to maximize these contributions. The limit for 2019 is $19,000 for those under age 50 and $25,000 for anyone 50 or older. For those turning 50 in 2020, plan to adjust your contributions to take advantage of the additional $6,500 “catch-up” contribution. So, if you aren’t going to have time to max out in 2019, now’s the time to start planning to do so in 2020.

Many employers match contributions made toward retirement plans. Even if your cash flow doesn’t enable you to save the maximum amount, make sure to contribute at least enough to receive any company match. According to a 2015 report by the independent advisory firm Financial Engines, 1 in 4 employees is missing out on receiving the full company match, leaving an average of $1,300 of “free money” on the table every year.

For those already contributing the maximum amount, don’t stop there; consider contributing to a traditional or Roth Individual Retirement Account (IRA) as well. The good news is the deadline to make these contributions for 2019 isn’t until April 15, 2020. If your income is too high, you may not be eligible to contribute to a Roth IRA. However, anyone with earned income can contribute to a traditional IRA, although there are income limits that determine whether those contributions are tax deductible. The 2019 contribution limit is $6,000, plus an additional $1,000 if you are 50 or older.

Donate to Charities.

Another way to lower your tax bill is to accelerate certain deductions this year. For those who itemize their deductions, charitable contributions made by year’s end may offset some of your taxable income. For additional tax savings, consider donating stocks or other securities that have appreciated, instead of cash. If you’ve owned a security for longer than a year, you can take a deduction for the fair market value of the security and also avoid paying capital gains tax on the appreciation.

Due to the increased standard deduction as of 2018, far fewer taxpayers are itemizing their deductions, often resulting in charitable contributions becoming non-deductible. In 2019 the standard deduction for single taxpayers is $12,200 and for married couples filing jointly it stands at $24,400. Depending on your tax situation, you may benefit from pre-funding multiple years’ worth of charitable contributions into a single year by utilizing a donor advised fund (DAF). By doing so, the goal would be to have your total itemized deductions be higher than the standard deduction in that single year, making your contributions deductible in the year of funding. Ideally, you would contribute appreciated securities to a DAF. Then, you can utilize the pre-funded DAF to send donations to charities throughout the years ahead.

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Over 30 states offer a state income tax deduction or tax credit for 529 plan contributions. In most cases, the taxpayer must contribute to their home state’s 529 plan to qualify for a state income tax benefit. For example, in my home state of Georgia, a married couple can claim a state income tax deduction on contributions up to $4,000 ($2,000 for single filers) to a Georgia 529 plan per year, per beneficiary.

While the state income tax deduction is a nice benefit, 529 plans can offer even greater tax benefits from tax-deferred growth and tax-free withdrawals when used for qualified education expenses down the road. Similar to your 401(k), these plans typically offer a lineup of investment options whose earnings are not subject to taxes, allowing your money the potential to grow for many years without the headwind of taxes.

Funds from 529 plans formerly could only be used for qualified post-secondary (i.e., colleges and universities). However, the 2017 Tax Cuts and Jobs Act expanded the rule to allow 529 funds to pay tuition for students attending private K-12 schools up to $10,000 per year, per student.

Take Your Required Minimum Distributions.

If you have an IRA, 401(k) or similar retirement account, the IRS requires you to take a minimum withdrawal from these accounts every year once you reach age 70½. These annual withdrawals are commonly referred to as required minimum distributions.

As the oldest Baby Boomers reached age 70 in 2016, this often-overlooked requirement is becoming more and more prevalent. Unfortunately, the penalty is a whopping 50% of the amount a person is required to withdraw if not taken. For example, a person required to withdraw $10,000 from their IRA would owe a penalty of $5,000, plus the amount of ordinary income tax owed on the $10,000 distribution.

Generally, a person must withdraw these funds by Dec. 31. However, anyone turning 70½ this year can wait until April 1, 2020. Doing so, however, means you’ll have to take two distributions in 2020, which may push you into a higher tax bracket next year. (How much is your RMD? Try our online calculator here.)

Offset Stock Market Gains by Selling Losers.

This strategy, called “tax loss harvesting,” allows you to reduce taxes on capital gains by selling stocks and other securities that have lost value. Even if your overall investments have grown in 2019, you may own one or two stocks or mutual funds that have lost money. By selling these stocks, you can reduce taxes and re-align your investments to meet long-term financial goals.

Taking even one or two of these actions before year’s end can help save on taxes. And making a habit of reviewing your financial condition each year as the holidays approach will provide an extra level of financial discipline that can improve your financial condition over the long term.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Ryan Halpern is a partner and adviser at CI Brightworth, an Atlanta-based investment company that provides custom wealth management solutions to individuals, families and corporations. He advises corporate professionals and executives on their personal finances and investments. He is a CPA, CERTIFIED FINANCIAL PLANNER™ practitioner, Personal Financial Specialist and has earned the CFA Institute Investment Foundations™ Certificate. He lives in Atlanta with his wife, Stacey, and daughter, Hayden.