23 April 2024

Help Clients Stay on Track with This 10-Point Year-End Financial Planning Checklist

#
Share This Story

Although 2020 has been a year of unexpected changes, one routine remains consistent: the fourth quarter means it’s time to help clients plan their finances for the new year. With new tax and retirement considerations related to the COVID-19 pandemic this year, it’s not too early to get going on those planning conversations with clients—this way, they won’t find themselves scrambling during the holiday season, and you’ll have the opportunity to reinforce the value you deliver.

The following year-end financial planning checklist highlights important points to use as a guide to help make your discussions with clients as productive as possible.

1)Max Out Retirement Contributions Are your clients taking full advantage of their workplace retirement accounts? If not, encourage them to consider increasing contributions to max out employer matches. Boosting contributions to an IRA could offer them tax advantages as well. Keep in mind that the SECURE Act repealed the maximum age for contributions to a traditional IRA, effective January 1, 2020. As long as individuals have earned income in 2020, they can contribute to a traditional IRA after age 70½—and, depending on modified adjusted gross income (MAGI), they may be able to deduct the contribution.

2)Refocus on Goals Did you work with your clients on savings goals for 2020? Evaluate how they did and offer to help them develop a plan—for setting realistic targets for next year as well as staying on track to achieve them.

3)Use Flexible Spending Account (FSA) Dollars If you have clients with FSAs, be sure to let them know the Internal Revenue Service relaxed certain “use-or-lose” rules this year because of the pandemic. Employers can modify plans through the end of this year to allow employees to “spend down” unused FSA funds on any health care expense incurred in 2020—and let them carry as much as $550 over to the 2021 plan year. For clients who don’t have FSAs, offer to help them calculate qualifying health care costs to see if it makes sense to establish one for 2021.

4)Manage Marginal Tax Rates Clients on the threshold of a tax bracket may be able to put themselves in the lower bracket by deferring some income to 2021. If your clients itemize, discuss the possibility of accelerating deductions such as medical expenses or charitable donations into 2020 (rather than paying for deductible items in 2021), which may have the same effect.

Here are a few key 2020 tax thresholds to keep in mind:

  • The 37 percent marginal tax rate affects those with taxable incomes in excess of $518,400 (individual), $622,050 (married filing jointly), $518,400 (head of household), and $311,025 (married filing separately).
  • The 20 percent capital gains tax rate applies to those with taxable incomes in excess of $441,450 (individual), $496,600 (married filing jointly), $469,050 (head of household), and $248,300 (married filing separately).
  • The 3.8 percent surtax on investment income applies to the lesser of net investment income or the excess of MAGI greater than $200,000 (individual), $250,000 (married filing jointly), $200,000 (head of household), and $125,000 (married filing separately).

5)Rebalance Portfolios Reviewing capital gains and losses for your clients may reveal tax planning opportunities; for example, they may be able to harvest losses to offset capital gains. You might ask clients to make introductions to their CPAs so you can collaborate on different options for them.

6) Explore Opportunities for Charitable Gifts Donating to charity is another good strategy to reduce taxable income—and help a worthy cause. In your planning conversations with clients, ask if they’re interested in looking into various gifting alternatives, including donor-advised funds. If they opt to make charitable contributions in 2020, they can deduct up to $300 for charitable contributions even if they don’t itemize deductions. This “above-the-line” deduction is new for 2020 under the CARES Act. If your client itemizes, the CARES Act also allows a deduction for all cash contributions to public charities up to 100 percent of their adjusted gross income. What about clients older than 70½? Don’t forget that neither the CARES Act nor the SECURE Act changed the qualified charitable distribution (QCD) rules. Clients older than 70½ can still make a QCD of up to $100,000 per person directly to a charity—and married taxpayers filing jointly may exclude up to $100,000 donated from each spouse’s IRA.

7) Form a Strategy for Stock Options Clients who hold stock options may need help developing an approach for managing current and future income. Consider the timing of a nonqualified stock option exercise based on a client’s estimated tax picture. Does it make sense to avoid accelerating income into the current tax year or to defer income to future years? For clients who are considering exercising incentive stock options before year-end, recommend they have their tax advisors prepare alternative minimum tax projections to see whether there’s any tax benefit to waiting until January.

8) Plan for Estimated Taxes and Required Minimum Distributions (RMDs) Both the SECURE and CARES acts affect 2020 tax planning and RMDs, so clients will have some additional considerations. Under the SECURE Act, individuals who reach age 70½ after January 1, 2020, can now wait until they turn 72 to start taking RMDs—and the CARES Act waived RMDs for 2020. Under the CARES Act, clients who took coronavirus-related distributions (CRDs) from their retirement plans have four options:

  • Repay the CRD.
  • Pay all of the income tax related to the CRD in 2020.
  • Pay the tax liability over a three-year period that includes 2020, 2021, and 2022.
  • Roll the funds back in over a three-year period. (Repayments will be coded as rollover contributions but won’t count as a client’s one allowable 60-day rollover per 12-month period.)

Clients will need to file IRS Form 8915-E to report the CRD repayment or its inclusion in taxable income. The IRS expects Form 8915-E to be available by the end of 2020. Remember that clients who choose not to repay the CRD will need to elect on their 2020 income tax returns how they plan to pay taxes associated with the CRD. It’s important to point out, however, that once clients elect a strategy, they can’t change it. Likewise, individuals who took a 401(k) loan after March 27, 2020, will need to establish a repayment plan and confirm the amount of accrued interest.

9) Adjust Withholding Clients who may be subject to an estimated tax penalty can consider asking employers (via Form W-4) to increase their withholding for the remainder of the year to cover shortfalls. The biggest advantage of this is that withholding is considered to be paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments. If you have clients who collected unemployment in 2020, remind them that any benefits they received are subject to federal income tax. Taxes at the state level vary, and not all states tax unemployment benefits. If individuals received unemployment benefits and did not have taxes withheld, they may need to plan for owing taxes when they file their 2020 returns.

10) Review Estate Documents Now is a good time to review and update estate plans for clients to make sure they align with goals and account for any life changes or other circumstances. Take time to:

  • Check trust funding
  • Update beneficiary designations
  • Take a fresh look at trustee and agent appointments
  • Review provisions of powers of attorney and health care directives
  • Ensure that clients fully understand all of the documents

Be a Resource Although this year-end financial planning checklist addresses many considerations, it’s really a starting point for your planning conversations with clients. Reach out proactively to let clients know you’re available to help them get a jump on planning now and talk through the issues and deadlines most relevant to them. And remember, if you make this a collaborative process with their CPAs, attorneys, and other experts, you can help ensure that your clients reap the most benefits—and deepen your relationships along the way.

Click here for the original article.

Join Our Online Community
Join the Better Way To Retire community and get access to applications, relevant research, groups and blogs. Let us help you Retire Better™
FamilyWealth Social News
Follow Us