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Tax Strategies: Expert Advice for Year-End Financial Planning

As the end of the year approaches, many people are thinking about their finances. It’s imperative that certain steps be taken by December 31 in order to avoid huge tax liabilities come April 15. Financial strategies and tax planning can vary greatly for each individual, and these intricacies and complicated tax codes can make planning on our own very difficult.

This is why it’s so important to take the time to get advice from the right people. Whether that’s a CPA, a financial planner or other financial expert, devising a sound financial plan is key. And the younger you start, the better.

“I read that the average family spends more time planning their annual summer vacation than they do on their financial plan over their lifetime,” says Ted Fischer, a Certified Financial Planner® and founder of Fischer Investment Strategies in Westlake Village. “One little mistake in planning can cost people so much money—more than the amount of savings they generate by not having a certified financial planner.”

So, we asked a few financial experts to weigh in on how to lessen tax liability and make the most of assets. Their advice may inspire you to contact a financial planner to evaluate (or start!) your own portfolio.

Put money into a retirement plan

“For younger people, I would advise doing a Roth IRA, which doesn’t save you on taxes now, but it will save you on taxes later,” says Laura Raulinaitis, a certified financial planner who, along with her husband Darius Raulinaitis, CFA, founded The Lake Avenue Group at Morgan Stanley in Westlake Village. “A Roth conversion is where you convert a traditional IRA into a Roth, which you pay taxes on now, but Roths are tax-free forever, so there is no required distribution.”  

Also, if you can afford to do so, she recommends maxing out your retirement contributions every year. If you can’t, make sure you’re putting in at least what your company matches. A match is 100% return on your money. If your company does not offer a retirement plan, set up one in which to contribute.  

Donate to charities and gift money to others

“One of the most overlooked opportunities to save on taxes is by making charitable contributions with your required minimum distribution (RMD),” says Raulinaitis. “A lot of people also do their gifting at the end of the year to charities because they are looking for write-offs and also hopefully because they’re good natured. If you donate directly from your RMD to the charity, you don’t have to pay tax on that money.”

Or, if you have highly appreciated securities, she explains, you can give those to a charity and neither you nor the charity will have to pay taxes on that money. For example, if you bought a stock that was worth $1,000 and is now worth $10,000, you can give those gains to the charity.

“I’m sure you are hearing about the tax reform proposals on the horizon, but it’s a little too early to say what will be enacted,” says Michele Shipp, senior trust officer with Montecito Bank & Trust in Montecito. “But the general concept is if you bundle charitable deductions in a year where your income tax liability is higher, there’s a greater benefit of that charitable deduction in that one year as opposed to taking it over multiple years.”

“Montecito Bank & Trust’s Central Coast branches have given away a million dollars a year for the last 17 years to local nonprofits in Santa Barbara and Ventura counties,” says Suzi Schomer, senior vice president and wealth strategist also with Montecito Bank & Trust in Montecito.

“That’s a source of great pride for Montecito Bank & Trust and it inspires other donors,” she adds. “When they see the list of organizations to which we annually give, sometimes that creates an interest in those organizations which we’ve already vetted. As we emerge from the coronavirus, there’s a wonderful spirit of giving that hopefully clients are feeling drawn to, not only for tax planning but for community giving.”

In order to have a tax deduction, you want to make sure the charity is an eligible organization which is usually under the tax code 501c3.

Gifting to family is another way to lessen tax liability. “The maximum amount allowed is $15,000 per person per year, so a husband and wife can gift up to $30,000, but it’s unlimited when paid directly to educational and medical providers,” says Schomer. “That can be for things like eyeglasses, braces, private school tuition, or a qualified camp, so there are lots of ways you can exceed that amount per year. It also includes insurance premiums.”

Also, she explains, if you have a young family member who is an employee and he or she is earning earned income that could be taxable income, it’s possible to gift to this person the amount of their earned income that could go into a qualified IRA or Roth IRA. “That’s a good way to provide the liquidity needed to get started on something that they hadn’t started earlier in the year. They can take the cash and use that to fund these plans.”

In addition to relatives, cash can be given to others as well. “You can give up to $15,000 per year (in 2021) to as many people as you like,” says Managing Director Stephen Meli, CRPC®, MBA, at Westlake Private Wealth Management in Westlake Village*. “These gifts can be made to anyone, not just family members. Cash gifts are a simple way to gift and the most common.”

Generally, he explains, taxpayers must itemize their deductions in order to benefit from this cash contribution. “However, a special rule applies for 2020 and 2021 that allows taxpayers to claim $300 (increased to $600 for joint filers in 2021) in addition to their standard deduction for cash gifts to qualifying charities.

“Also, for 2020 and 2021 only, charitable contributions of cash given directly to a qualified charity have the potential to offset up to 100% of your adjusted gross income (AGI) (60% of AGI for cash gifts to a donor-advised fund, 30% for cash gifts to a private foundation). Other donations can include gifts of appreciated securities held longer than a year, qualified charitable distributions, charitable bequests at death and ‘bunching’ of charitable contributions via a Donor Advised Fund (DAF), which have different AGI limits and rules.”

Review your financial plans, financial goals and budget

“What that means is you’re looking at where your accounts are, where your assets and liabilities are, and having a good snapshot of your net worth,” says Fischer. “Am I under water or above water? Did I make any improvements from the year before or am I going downhill? What’s working and what’s not working?

“What everybody wants to do is improve their net worth, have lots of assets and very little risk, and reduce debt, so that when you get older you have the ability to make choices whether to retire or not retire.”

When to take social security is also a very important decision, and one you should make with an expert. “I do a review using a Social Security calculator in my financial planning software,” he says. “We go through 600 different variables that provide us the most optimal strategy.”

Another critical thing for people to do is review their monthly and annual budgets. “I made it easy for my clients by creating an easy-to-read budget worksheet,” says Fischer. “People don’t like talking about the ‘B’ word because many are in total denial about how much money they’re spending. But at the end of the day, I never had anyone ever tell me it was a waste of time. They usually thank me.”

Employees, he adds, should look at their annual company benefits every year to see what might be new and what they may be able to take advantage of like HSAs, FLEX plans, Disability or Term Life insurance. Group benefits generally have a lower cost than individual benefits.

Review your estate plan as well, he advises. “Along the way, there might have been a death, a birth or a divorce, so it’s important to review and update your beneficiaries on these accounts.”

Offset required minimum distributions (RMD)

Each year, people over age 70.5 (or 72, depending on their birthdate and maybe the year they retire) have to take RMDs from their retirement plans. “They then have to decide if there’s a way to either take an RMD or do a special kind of distribution from an IRA, called a ‘qualified charitable distribution,’ which has some very significant impacts both in terms of taxable income and the Part B and Part D surcharges for Medicare,” says Schomer. “This taxation issue has many more implications on a monthly basis for all of the next year in terms of surcharges on Medicare payments. That’s something that is little understood and it’s not always on top of people’s minds.

“Year-end tax planning regarding IRAs is a really fantastic opportunity for both charitable contributions and also to reduce the balance that would be on the account at the end of December, which generates next year’s required minimum distribution. So this is really a key component for people for whom it applies.”

Take advantage of tax-loss harvesting

“Coming off 2019 and 2020 with nearly all indices positive, there might be a great deal of unrealized gains,” says Meli. “Couple that with the first half of this year with the S&P 500 up over 15%, and there could be even more unrealized gains. If a client’s portfolio has been rebalanced this year, inevitably there should be realized gains, and probably more than what they’ve experienced over the last few years.

“‘Tax-loss harvesting’ is a process that we employ yearly, which means we sell any investments with an unrealized loss and replace that investment with a similar asset. Unfortunately, some years it’s more difficult to realize losses than others, and I’m afraid 2021 is going to be that year as there aren’t many investments that haven’t gone up over the last few years.” 

Work with an expert to design and optimize a financial plan

As you can clearly see, there are many ways to manage your money and other assets, and these are but a few. The real key is having a financial expert carefully review your unique needs and goals.

“Whether you’re married and have a family, or are an individual, it’s so important to work with a professional to help put together a strategy specific for you and your family,” says Meli. “Not only with regard to your investment portfolio, but a cash-flow analysis for your retirement, a plan to send your children to college, a health care directive, insurance and long-term care needs analysis and an estate plan.”

“The purpose of a financial advisor is to help you have a financial plan, and your financial plan will include the things discussed in this article,” says Raulinaitis.  

Adds Shipp, “We take a team approach to providing investment advice and administration for wealth management accounts. Our portfolio manager would be on that team and be the expert who would provide investment advice using a variety of factors and it would really be customized for that particular customer’s needs. Hopefully, the information given here will be a call to action for people to reach out to their advisors, CPAs, attorneys and/or investment advisors.”

Of course, we can only include so many financial tips in one article. There are many other ways to save money, invest wisely and plan for the future. Contacting one of the professionals above or finding your own highly experienced and educated financial expert is the first and most important step for smart financial planning. With the end of the year fast approaching, don’t wait too long to get in touch. It might just be the best investment you’ll ever make.

*Wells Fargo Advisors Financial Network is not a legal or tax advisor. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Westlake Private Wealth Management is a separate entity from WFAFN.

  • Suzi Schomer, Senior Vice President and Wealth Strategist, Montecito Bank & Trust
  • Michele Shipp, Senior Trust Officer, Montecito Bank & Trust
  • Stephen Meli, Managing Director,, CRPC®, MBA, Westlake Private Wealth Management
  • Laura Raulinaitis, Certified Financial Planner, The Lake Avenue Group at Morgan Stanley
  • Ted Fischer, Certified Financial Planner® and founder of Fischer Investment Strategies