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It’s Time For Year-End Financial Planning

Posted by: Advisors Management Group in Tips

Getting your finances ready for the end of the calendar year takes time, so it’s wise to start thinking about your financial to-do list now. Since most year-end financial planning opportunities have firm deadlines—often December 31st—acting now can help ensure you don’t leave money on the table. It’s not all upside though: failing to take certain actions can mean hefty penalties in some cases.

Financial Planning 1:Check Your Tax Withholding

Even individuals with only W-2 income from a regular paycheck can be caught off guard by a surprise tax bill and/or an underpayment penalty. That’s why it’s important to start your financial planning. After the new tax law went into effect in 2018, the withholding tables changed, leaving some taxpayers with a big bill.

Estimating your annual income at the beginning of the year can be difficult for individuals with lumpy or unpredictable income, such as business owners or employees working on commission. Recalculating your withholding using the IRS withholding calculator closer to the end of the year could help some workers avoid an underpayment penalty or surprise tax bill come April.

Here’s how: if taxes are withheld through a payroll deduction, those tax payments are always deemed to be timely paid. This enables some individuals to catch up on any previous under-withholding once they have more concrete income estimates near year-end.

If you make quarterly tax payments instead, be aware that even if you increase estimated tax payments during the year, it may still not be enough to avoid penalties if any previous payments are deemed to have been ‘underpaid’ based on your actual income at the end of the year. To avoid an underpayment penalty, taxpayers can make quarterly payments of at least 110% of last year’s tax liability (if their adjusted gross income is over $150,000).  

Financial Planning 2: Consider Refinancing a Mortgage or Student Loans

Interest rates have generally been on lower this year due to the uncertainty around the trade war and rate cuts by the Federal Reserve. If you’ve been putting off the decision to refinance a mortgage or student loans, now may be the time to start planning. Before reaching out to a lender, there are several considerations to be aware of.


As you move through your fixed mortgage term, the proportion of your monthly payment that’s allocated to the principal will increase and your interest expense will decrease. If you’re well into your loan, it may not make sense to refinance after considering closing costs. Also, consider whether it’s beneficial to refinance into a different type of mortgage. If you bought a home with an adjustable-rate mortgage because you didn’t expect to own the house for very long, but now your plans have changed, it may make sense to switch to a conventional fixed 15 or 30-year mortgage. Alternatively, if you’re 10 years into a mortgage and decide to refinance, consider the pros and cons of an adjustable-rate mortgage (ARM) if you’re planning to sell before the interest rate becomes variable. Just keep being aware of the risks should your plans change.

Student Loans

Graduates with significant student loans can sometimes find relief by refinancing. Assuming your income and credit score is strong, it can be possible to shave a few points of your rate. Be aware that refinancing student loans may require a shorter loan period, even as little as five years. Refinancing from a federal loan to private lenders can also mean sacrificing some benefits, such as loan deferment, forbearance, and loan forgiveness (for those who qualify). If you have multiple loans, you can always consider refinancing only the ones with the highest interest rates, to help make it more affordable given the truncated payback period.

Financial Planning 3: Give Your 401(k) a Checkup

This is an easy one to forget in your financial planning goals. Often enough we set it and forget it…but it’s great to check it at least once a year! This fall spend some time making sure your 401(k) plan is properly configured. If you’re not already on track to meet the annual contribution limit and are able to, consider increasing your election while there’s still time. In 2019, the maximum is $19,000/year though investors age 50 and older have an additional $6,000 catch-up contribution. Once the 2020 IRS contributions have been announced, you’ll want to update your contribution strategy for next year.

Also, review the 401(k) investment options as the fund lineup will change periodically. Assuming you are comfortable with your asset allocation, make sure your account doesn’t need to be rebalanced. Periodic rebalancing helps maintain your target asset allocation over time as some asset classes will outperform others.

Financial Planning 4: Plan Charitable Contributions

Two of the major changes in the Tax Cuts and Jobs Act that passed at the end of 2017 was the near doubling of the standard deduction and new $10,000 cap on state, local, and property taxes (SALT). The result is that far fewer taxpayers benefit from itemizing their tax deductions, which includes cash gifts to qualified charities. Due to these changes, other strategies have become more popular to help ensure charitably inclined individuals can still benefit from their gifts.

If you give cash, consider whether it’s advantageous to ‘bunch’ cash donations in one tax year instead of spreading them out equally over two.

For example, a couple has $10,000 in state, local, and property taxes (the maximum), $5,000 in mortgage interest expense, and $8,000 in cash donations to qualified public charities for a total of $23,000 in itemizable deductions. In 2019, the standard deduction for married taxpayers filing jointly is $24,400, so the couple will not benefit from itemizing their tax deductions. If the couple bunched their charitable contributions, they’d make a gift of $16,000 in 2019, bringing their itemized deductions to $31,000, well over the standard deduction. In 2020, they would make no cash gifts to charity and claim the standard deduction.

Considering the changes to itemized deductions, it may be advantageous to consider which charitable giving strategies offer the best tax benefits. Other planned giving strategies, including donating highly-appreciated securities and gifting a required minimum distribution, may be advantageous over cash gifts.

Financial Planning 5: Watch the Timing of 529 Plan Distributions

The end of the calendar year is also a break between college semesters. Before the new semester begins in January, colleges send out tuition bills for parents and students to pay. Here’s where problems can occur: if you take funds from a 529 plan in December for a tuition bill paid in January, a portion of your 529 plan funds could be classified as a non-qualified distribution and potentially subject to income tax and a 10% penalty if total 529 plan withdrawals for the year were more than the qualified higher education expenses paid.

Since the calendar year, qualified expenses must align to the calendar year 529 plan withdrawals, issues could also arise if a distribution was made in January to cover expenses paid in December. There’s a lot to keep in mind, so consult the financial aid office to help ensure you’re using the appropriate expense figures and not double-counting any tax benefits, such as the American Opportunity Tax Credit, Lifetime Learning Credit, or expenses covered by tax-free scholarships. 

Financial Planning 6: Flexible Spending Accounts: Use it Before You Lose it

There are two types of flexible spending accounts (FSAs) your employer can sponsor medical and dependent care. With a medical FSA, you can pay for (or get reimbursed for) certain qualifying medical expenses using pre-tax dollars. Since your annual FSA election was based on your projected medical costs for the year, over-contributing is common. Depending on the plan rules, your medical FSA must either be fully depleted during the calendar year or up to $500 can be rolled over to next year. Otherwise, your contributions will be forfeited.

In a dependent care FSA, pre-tax contributions can be used to reimburse parents for qualified childcare expenses that are incurred to enable you (and a spouse, if married) to work, look for work, or enroll in school full time. Although there are instances where adults can be claimed as a dependent, for most, qualified dependents are your children under age 13. The contribution limit in 2019 is $5,000 for married taxpayers filing jointly. Unlike medical FSAs, there is currently no rollover provision for unused balances in dependent care FSAs.

The end of the year can be hectic. Considering how challenging it can be to tackle routine financial tasks throughout the year, don’t procrastinate these important financial planning moves—the deadlines are no longer self-imposed.

Source: Forbes

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