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Year-End Things to Think About

By Rick Imhoff, CFP ®

It’s that time of year when thoughts of reviewing year-end financial strategies enter our mind – in addition to planning for the holidays, of course.  Here are five financial things to think about:    

Realize Losses
If you look at your portfolio and there are one, two, or maybe more stock, mutual fund, or ETF holdings that are currently at a loss, you probably mistakenly make the emotional decision to hang on to it in the hopes that it will get back to at least what you paid for it and then maybe sell it.  However, it is better to just go ahead and sell it now, realize the loss, and use the loss to offset other realized gains, if any. If there are no realized gains, you can deduct up to $3,000 of net capital losses on your 2019 income tax return, potentially saving you several hundred dollars in taxes depending on your tax bracket.  Not only do you get the benefit of reducing your income taxes, you also don’t have to look at that loss every time you look at your portfolio.

Of course, this may be a stock, mutual fund or ETF you would like to hold for a longer-term investment.  Go ahead and take the loss, wait at least 30 days and buy it back.  You get the benefit of realizing the tax loss on your tax return and buy it back at a lower price.  

Take Your RMD
If you are at least age 70 ½, you are required to take a required minimum distribution (RMD) from your IRA.  If you are still employed and have a 401(k) plan with your employer, you are not required to take a minimum distribution until you are retired.  That is not the case with your IRA.  The IRS gives you a great incentive to take your RMD each year because if you don’t, you will be subject to a hefty 50% penalty.  You have all calendar year to take your RMD, but don’t wait until the last minute.  Depending on your IRA custodian or trustee, they might need a few days to do the necessary paperwork to make a timely distribution before year-end.  

Annual Gifts to Family
For the 2019 calendar year, you can give up to $15,000 per year to another individual and not incur any gift or estate taxes.  If you are married, you and your spouse can jointly give up to $30,000 to the same individual.  This can be very useful if you have a large estate that exceeds the current federal estate tax exemption amount of $11.4 million per individual.

In addition to the $15,000 limit, you can pay medical expenses and tuition for the same individual and not be subject to any gift or estate taxes on the amount, only if you pay the medical provider or school directly.  This can also be very useful if you have family members who are faced with high medical expenses or needing help to cover tuition costs to attend a school or college.  

Charitable Gifts
With the recent significant increase in the standard deduction, fewer taxpayers are able to itemize their expenses, which would include charitable contributions.  One option is to “bundle” your contributions.  For example, instead of making annual donations to your favorite charity, you can make a larger one every few years so the amount can exceed the standard deduction.

If you have an IRA and are at least age 70 ½, you can use part or all your RMD to make your charitable contribution.  Just ask your IRA custodian or trustee to make a check payable to your favorite charity and either have them mail it directly to the charity or give the check to you to deliver the check yourself.  Any amount from your IRA, up to a maximum of $100,000 annually, can be paid to a qualifying charitable organization and help to partially or fully satisfy your RMD for the year.  Keep in mind that you don’t get a charitable deduction on the contribution, but you also do not have to pay income tax on the amount sent to the qualifying charitable organization, which can help to reduce your taxable income.    

Rebalance Your Portfolio 
Oftentimes, especially when the market performs well, we neglect to review our investment portfolio to see if it should be rebalanced.  For example, if your target allocation is 30% equities and 70% fixed-income, but the current allocation is 40% equities and 60% fixed-income, it would be a good idea to bring the portfolio back to the target allocation and to maintain your desired level of risk.  Of course, when doing your rebalancing, be sure to check on what the net realized capital gain or loss would be if the portfolio is fully rebalanced.  Not that taxes should outweigh investment decisions, but it is something to consider.