Although many of us are now in full holiday preparation mode, now is also the time to ensure that our finances are in proper order before the end of the year. Below are some of the more critical actions I recommend you consider taking before year-end.
Consult with your accountant. If you’ve had any changes in your financial situation from last year and haven’t yet adjusted your withholdings or estimated tax payments, now is the time to provide that updated information to your accountant and determine if you need to make any additional tax payments before the end of the year. These changes may include income changes, deduction changes, and any capital gains you may have realized during the year. Don’t forget to include capital gain distributions from any mutual funds you may hold. Typically, these funds distribute their capital gains in mid to late December, post their distribution amounts on their website and may be significant this year given market conditions. Your accountant can advise you on the best way to pay any tax deficit you may have incurred.
Consider realizing investment losses. With markets at all-time highs, you may have realized capital gains on some of your investments earlier in the year. In addition, if you own stock mutual funds, as mentioned above, chances are that they will soon distribute capital gains from sales within the fund itself. If you happen to have investments trading at losses, now is the time to consider selling some of those investments to offset any gains you may have acquired during the year.
Consider making charitable donations. If you are charitably inclined and haven’t yet donated to your favorite charity(-ies) this year, consider doing so before the end of the year to capture the tax deduction for your tax return. Instead of donating cash, you may wish to consider donating low cost basis stock (see prior blog articles - Get to Know Your Cost Basis Now & Save at Tax Time and 5 Ways to Handle Investments with Missing Cost Basis - for more information on investment cost basis) as a way to remove some of that low basis exposure from your overall portfolio. You can not only transfer shares of low basis stock directly to a charity, but you can also transfer it to a donor-advised fund, a type of charitable investment account, and then make charitable donation recommendations from that account to your favorite charities. You receive the full tax benefit of transferring shares at the time you transfer them to the donor advised fund.
Consider timing of additional stock sales. While equity market prices are currently quite attractive, if you are looking to sell additional shares of stock, assess whether it makes sense to sell them before the end of the year, adding to your current tax bill, or to wait until early next year instead, deferring any capital gains tax to that tax bill instead.
Consider where to invest sale proceeds. If you’ve sold investments this year and the proceeds are invested in your brokerage money market fund, consider transferring those proceeds to an account earning greater interest. Money market funds are currently providing very low interest rates and while regulatory changes were implemented after the Global Financial Crisis to help minimize the risk that these funds would lose their principal value in the future (called “breaking the buck”), there is no guarantee of this. In contrast, many online banks are currently offering 0.50% - 1.00%+ annual percentage yields (APY) on savings accounts, and these accounts are FDIC-insured up to $250,000.
Consider transferring company stock to your brokerage account. If you have shares of company stock held at your company’s record-keeper/custodian, now is a good time to consider transferring those shares to your brokerage account. Once in your brokerage account, selling or transferring them to a charity or a donor advised fund will likely be much easier than initiating those transactions from your company’s record-keeper/custodian.
This article provides some of the more critical financial actions to take before year-end but is by no means an exhaustive list. Should you wish to discuss other actions that might be appropriate for your specific financial situation, please feel free to contact me at (925) 954-4966 or email@example.com.