Money Checkup Podcast

Episode 18: Mid-Year Check In

Episode 26: Give Yourself A Year-End Financial Checkup

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As the end of the year approaches, make sure you make time to review your finances for 2019 and prepare for 2020. From retirement plan contributions to employee benefits to tax returns, work with your financial advisor and CPA to make sure you’re on track to maximize your tax benefits and save for your future. 

 

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Review your pay stubs

Examine your pay stubs from throughout the year, especially if you receive income unevenly, to make sure you’re on track to fully pay the taxes you owe this year. If you review your withholding and find that you still owe tax payments, you can adjust your withholding by filling out a W-4 and filing it with your employer. 

This is especially important if you’re likely to receive an end-of-year bonus — the amount withheld on bonuses is usually not sufficient to cover your tax burden, especially if you are a high income earner or part of a dual-income household. 

If you are self-employed, make sure you’ve made adequate estimated tax payments in the first three quarters of 2019. Your Q4 payment is due on Jan. 15. If your income has changed, make sure to adjust your tax payment accordingly so that you avoid penalties in 2020.

If you’re unsure of what your tax burden will be for 2019, you can protect yourself using the safe harbor rule. Review your 2018 tax return and multiply your total liability by 1.1. If you’re on track to pay at least that amount through estimated tax payments and withholding, you should avoid penalties and interest. If not, make a payment for Q4 to make up the difference. Note that in order to meet safe harbor requirements, you need to pay in at least 100% of your current year liability or 110% of your prior year liability.

You can also use your pay stubs to revisit your retirement plan contributions. Remember that the 401(k) deferral limit of $19,000 is a cap across all plans. If you work multiple W-2 jobs that offer 401(k)s, make sure you do not exceed $19,000 across all those plans. 

Finally, use your pay stubs to review your employee benefits and adjust them during open enrollment if necessary. 

If your health insurance plan is HSA-eligible — i.e., a high-deductible plan based on limits set by the IRS — the contribution limits will increase in 2020 to $3,550 for an individual and $7,100 for a family. Your HSA contribution amount typically needs to be set during open enrollment, so put yourself on track to max out your HSA if you want to. Note that these limits include both employee and employer contributions. 

Remember, you put money into your HSA pre-tax, and you can take that account with you for years until you need it. If you can afford it, FIT Advisors often suggests that our clients max out their HSA and then invest those funds to create a nest egg for medical expenses in retirement. 

If you are in the process of planning for children, consider revisiting your health insurance plan during open enrollment. A high-deductible plan is usually not ideal during pregnancy or with small children. 

Also, review your childcare spending and medical costs and request reimbursement from your dependent care and healthcare FSA, if you have one. FSAs are use-it-or-lose-it plans, so make sure to modify your contributions for 2020 so you save exactly as much as you need. 

Review your retirement plan contributions

In 2020, you’ll be able to contribute slightly more to your retirement accounts than you did in 2019. These changes include: 

  • The 401(k) deferral limit will increase from $19,000 to $19,500. 
  • The catch-up contribution amount will increase from $6,000 to $6,500. If you are 50 or older, you can contribute $6,500 on top of the $19,500 limit, for a total of $26,000. 
  • The limit on combined employer and employee contributions will increase from $56,000 to $57,000. 

If you want to max out your retirement accounts next year, modify your automatic withdrawals during this year-end period so you begin saving right away. 

Business owners should note an additional change for 2020. If you have a defined benefit plan set up for your practice or your business, the salary at which your ability to max out your plan will increase from $280,000 to $285,000. Discuss salary adjustments with your CPA.

The social security wage base is also increasing in 2020. In 2019, employees and S Corporation owners paying a salary paid social security tax on wages up to $132,900. In 2020, that will rise to $137,700. If you have earnings higher than that, you will not have to pay social security tax on wages that exceed $137,700. 

Harvest your capital losses

Once you’ve sorted out your retirement accounts and employee benefits for 2020, turn to your taxable accounts. See if you hold any positions that have posted a loss in 2019 to date. If so, you can sell out of that position and take the loss, or “harvest” the loss, which can offset capital gains.

If you still have losses left over after offsetting your capital gains, you can use up to $3,000 in losses to offset your income. If you have even more left over, you can carry those losses forward into future tax years indefinitely. 

If you are an active investor, make sure you avoid the “wash sale” rule. If you sell a position for a loss, you cannot buy an identical position within 30 days, or the IRS will disallow the loss. If you sell a position in a Vanguard S&P 500 index fund, you cannot buy another Vanguard S&P 500 index fund within 30 days — although you can buy an S&P 500 index fund with another brokerage, or a different index fund with Vanguard. 

Do a backdoor Roth IRA conversion

Once your income exceeds a certain level, you are no longer eligible to contribute directly to a Roth IRA. But you can still fund a Roth by making a non-deductible IRA contribution and converting it to a Roth. This is cleanest when you have no other IRAs account outside of a Roth IRA; once you add SEP, SIMPLE and other IRAs, a pro rata portion becomes taxable. 

You technically have until April 15, 2020 to fund a Roth IRA for the 2019 tax year. But it’s easiest if you make this conversion in 2019 so that everything will be reported on the same year’s documents. 

Review your tax deductions

A number of changes to the tax code took effect in 2018. Standard deduction rose to $12,200 for individual and $24,400 for a married couple. For taxpayers who itemize, the deduction for state taxes is capped at $10,000 per year — so if you live in a high-tax state, you may notice that your itemized deduction amount fell between 2017 and 2018. 

The mortgage interest tax deduction for newly purchased homes was also changed in 2018. You can only deduct interest on loans of up to $750,000, down from $1 million. If you purchased your home prior to 2018, you are grandfathered into the old rule and can continue deducting $1 million of mortgage interest. 

Since rates have come down, refinancing has become popular.  Note that if you refinance your home for the same amount, you’ll retain the $1 million interest deductibility if the home was purchased prior to 2018. But if you do a cash-out refi — meaning you pull out some of the equity you’ve built as cash — that will cause you to be regulated under the new cap. 

Lastly, 2018’s changes meant you could no longer deduct unreimbursed employee expenses. 

You may have noticed in 2018 that your itemized deductions were lower than in previous years. If you want to increase your deduction amount for 2019, consider making year-end charitable donations or creating a donor-advised fund. When you contribute to a donor-advised fund, your contributions are immediately deductible. You can also donate appreciated securities to a donor-advised fund, which allows you to avoid paying capital gains tax on that investment if you sell it. 

Those funds are then invested. You can use your donor-advised fund to recommend grants to any IRS-qualified public charity. You take the tax benefit in the year the contribution is made, so you do not receive a corresponding deduction when you make grants from your donor-advised fund. However, this can be a great vehicle for investors who are charitably inclined.

Consult with your CPA if you’re interested in creating a donor-advised fund to ensure that you receive the full tax benefit while maximizing your charitable impact. 

Review your tax return from 2018

Now that another year has passed since the tax changes that took effect in 2018, it can be helpful to review your 2018 tax return as you prepare to begin your 2019 return. 

The Qualified Business Income deduction changed in 2018. This provision allows business owners to deduct up to 20% of qualified business income (QBI) from a business that operates as a sole proprietorship, partnership, S Corp, estate, or trust. You can deduct either 20% of your QBI or 20% of your taxable income, whichever is less.

If your taxable income in 2019 exceeds $160,725 for a single filer or $321,400 for a married couple, the deduction has some limitations. Above that threshold, your deduction may be limited based on the type of business you operate, the amount of W-2 ages paid, or the unadjusted basis of property. If you run a service business, note that there is no deduction once your taxable income exceeds $210,725 for individuals or $421,400 for married couples if you are in a service business.

After your CPA runs your 2019 tax projections, consider the ways in which you might reduce your taxable income. Max out your retirement plan contributions. If you or your employer offer deferred compensation plans, you may be able to make the necessary elections during open enrollment. Consider accelerating your business deductions or deferring income to future years — for example, by holding off on exercising stock options, delaying your bonus to the following year, or delaying certain invoices. Finally, discuss potential equipment purchases with your CPA to see which could be most beneficial to you. 

Note that certain deductions that reduce taxable income can also reduce qualified business income. This includes the deductible part of self-employment tax; SEP, Simple and Solo 401(k) retirement plan contributions; and any self-employed health insurance deduction. 

As a CPA, the new tax law has created some situations I find very interesting. I’ve seen business owners whose taxable income dropped enough to take the full QBI deduction. Work with your CPA to make sure you capture as much of that benefit as possible.

Do a tax projection for 2020

Tax season is finally over, which means most CPAs have enough free time to help their clients with tax projections for 2020. This is especially important for 1099 employees and business owners. Your CPA can help you determine how much you owe for 2019 and how big your estimated tax payments should be going into 2020. If you still owe any tax payments for 2019, your CPA will help you make your proper Q4 payment. 

Starting 2020 off on the right financial foot will make your whole year easier. Schedule some time with your financial advisor today.

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