Year End Planning

With the year end quickly approaching, I often discuss the topic of Year End Planning with my clients. Why? It’s a time to evaluate - both to smartly wrap up the current year and to prepare for the year ahead strategically.

Here are some strategies you can utilize to maximize your wealth planning for the year ahead:

  • Tax-Loss Harvesting
  • Rebalancing
  • Beneficiary Review
  • Retirement Account Contributions
  • RMDs and QCDs
  • FSA Utilization
  • Gifting from an Estate Planning Perspective
  • Charitable Giving Review
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Tax-Loss Harvesting

Tax-loss harvesting is a strategy where an advisor can add value by selling taxable* investment assets such as stocks, bonds and mutual funds at a loss to lower your tax liability.  You can apply these losses to offset potential gains elsewhere in your taxable portfolio, allowing you to reduce any capital gains tax you may owe.

After offsetting the capital gains due to the losses, an investor can use up to $3,000 of losses annually, over and above the losses used to offset gains, against their ordinary income and can carry over any remaining losses to offset income in future years. The main goal of tax-loss harvesting is to defer income taxes into the future, hopefully until after you retire, when it is likely you will be in a lower tax bracket.

It’s worth noting that those that outsource their investing to mutual fund companies or ETFs can be very limited in what they can accomplish with tax loss harvesting. It’s one of the reasons we’ve built our personalized indexing systems and methodologies.

*Note: As a reminder, tax-loss harvesting does not apply to your tax-advantaged accounts (Examples 401(k), IRA, Roth, and SEP IRA).


In a year when the market has been on an upswing and multiple different sectors have performed well at different times, it is common for an investment account to have moved away from your right-fit risk allocation. As we head into the end of the year and beginning of next year it is a good time to review where your portfolio sits today and whether the allocations have shifted from your ideal allocation. If so, now may be a good time to trim some of your gains and reallocate to move your portfolio back into a risk allocation you are comfortable with.

At WealthFactor we leverage technology to reduce the need to manually think about things like rebalancing.  Rebalancing is an important part of every investment plan, but it should not require you or an advisor to manually do this.

Beneficiary Review

Although you ideally want to update beneficiaries and contingent beneficiaries any time there is a material change, it is a best practice to review it at least annually. Be sure that your will and estate planning documents are up to date and beneficiary designations reflect your current wishes - were there any new grandchildren, did you buy some new property, go through a divorce, etc. As your circumstances change, you need to make sure your beneficiaries reflect your desires. It happens too often where someone leaves an ex-spouse accidentally as a beneficiary.

Retirement Account Contributions

Pay yourself and save taxes at the same time by taking advantage of Tax Advantaged retirement accounts, 401(k), and IRAs. Not only do these funds compound and grow over time, they also lower your taxable income. If you cannot maximize your 401(k) contributions, at least give to the employer's match. These pretax dollars will allow you to plan for retirement and lower your taxable income.

Remember 401(k) contributions must be made by December 31st while you can make IRA contributions up to the tax filing deadline each year.

RMDs and QCDs

If you are 72 years old make sure you take any Required Minimum Distributions (RMDs) by December 31st or the penalty is 50% of the total RMD you forgot to take. As a reminder, all funds coming out of all employer-sponsored retirement plans, traditional IRAs, and SEP and SIMPLE IRAs except ROTH IRAs and ROTH 401(k)s, are taxable as ordinary income. Also, you and your spouse must fulfill your individual RMDs - your distributions do not count towards your spouse’s RMDs.

If you are 72 years old and do not need the cash flow, you may want to consider Qualified Charitable Distributions (QCDs). The funds must go directly from your qualified account to the public charity.  By going directly to the public charity you remove the funds from being taxable as ordinary income for you. The main benefit for you as the taxpayer is the amount you donate will count towards your RMD for the year as well as accomplishing your charitable giving goals. 

If you are not 72 and in RMD you can still make a QCD, but there are limitations:

  • You must be at least 70 ½.
  • The max distribution is $100,000.
  • The charity must be a 501(c)(3) organization.
  • Contributions cannot be made to private foundations or transferred into a donor advised fund. 

Remember 401(k) contributions must be made by December 31st while you can make IRA contributions up to the tax filing deadline each year.

FSA Utilization

Don't forget that Flexible Spending Account (FSA) funds are “use it or lose it,” so if you don’t spend the entire amount in your FSA in 2021, you will lose it when 2022 arrives.

Gifting from an estate planning perspective

While not exclusive to year end planning, annual gifting programs can be an excellent way to minimize the potential for estate taxes and to optimize those plans there are often annual considerations. Gifting can be a good strategy as part of an estate plan as it allows you to move assets to the next generation currently as opposed to waiting until you are deceased and it passes through your estate. 

So what is a gift according to the IRS? You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

  • Gifts that are not more than the annual exclusion for the calendar year,  in 2021 the amount is $15,000  and in 2022 it is $16,000 per recipient.
  • Tuition you pay for someone paid directly to the educational institution and not as a reimbursement to the parent or student the tuition is being paid for. Note: tuition does not include room and board, supplies, books, or other fees. 
  • Medical expenses you pay for someone as long as they are paid directly to the institution and not to the person. 
  • Gifts to your spouse.
  • Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

The most common tax free gifting is utilization of the annual gift tax exclusion. In 2021, the exclusion limit is $15,000 per recipient, and it rises to $16,000 in 2022. For married couples each of these numbers double, so for instance Mom can gift $15,000 to her son, but Mom and Dad can gift a combined $30,000 to their son as each of the parents has their own $15,000 limit per recipient. The gift does not need to be a single gift; it could also be a series of gifts given throughout the year.

The IRS allows a person to give away up to $11.7 million in assets or property over the course of their lifetime and/or as part of their estate.  So, if a gift exceeds the annual exclusion limit, the difference is simply subtracted from the person’s lifetime exemption limit and no taxes are owed. This is done by filing a federal gift tax return.  

How does the basic exclusion amount apply in 2026 if I make large gifts before 2026?
There are other reasons to consider gifting currently as well. At the end of  2025, if Congress does nothing the estate and gifting exemption will revert from its current 2021 amount of $11.7 million to the pre-2018 amount of $5 million. Individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.  

One last thing to remember - an individual may make gifts to as many people as they want during the year (the individuals do not need to be related to you), utilizing the $15,000 tax-free limit on the gifts to each separate person and with no aggregate limit for you.

Charitable Giving Review

If you and your family have charitable intentions, the last part of the year is a good time to evaluate. Generally you will have a pretty good idea of what your income for the year is and what tax your situation is going to be for the year.

Also, keep in mind that you’ll need to itemize deductions to take advantage of the deduction for charitable donations. If your total itemized deductions are not greater than the standard deduction of $12,400 for individuals ($24,800 for married couples filing joint returns), then you will not get any tax savings from your donation.

Donating Appreciated Stocks vs Cash
One thing to consider is the donation of  appreciated stocks instead of donating cash. There are many charitable organizations who will accept donations of stock as well as cash. If you donate your appreciated stock, you avoid the capital gains, and the Non-profit keeps the money you would have paid the IRS in taxes. Donating stock fulfills your charitable intentions while also being smart about your wealth.

100% Limit on Eligible Cash Contributions Made by Itemizers in 2021
Subject to certain limits, individuals who itemize may generally claim a deduction for charitable contributions made to qualifying charitable organizations. As a general rule, a cash contribution made by an individual to a qualifying public charity is generally limited to 60% of the individual's AGI (adjusted gross income). Excess contributions may be carried forward for up to five tax years.

The law now permits electing individuals to apply an increased limit ("Increased Individual Limit"), up to 100% of their AGI, for qualified contributions made during calendar-year 2021. Qualified contributions are contributions made in cash to qualifying charitable organizations.

One last thing, you can deduct up to $300 in cash donations, even if you don’t itemize. This change came about as part of the CARES Act. The $300 limit applies regardless of your filing status, and it applies only to cash donations – non-cash donations don’t count. The maximum deduction is increased to $600 for married individuals filing joint returns.

Keep good records
The IRS reminds individuals and businesses that special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining an acknowledgment letter from the charity before filing a return and retaining a cancelled check or credit card receipt for contributions of cash. For donations of property, additional recordkeeping rules apply, and may include filing a Form 8283 and obtaining a qualified appraisal in some instances.

Below are the general requirements for various types of donations.

  • Donation of Less Than $250: A canceled check, credit card statement, receipt, or bank statement.
  • Donation of $250 or More: A contemporaneous written acknowledgment from the charitable organization.
  • Donation of $75 or More, plus you received something in exchange (such as tickets to a charity event): A written receipt or acknowledgment; you can only deduct the difference between what you gave and what you received.
  • Non-cash Donations Over $5,000: An appraisal prepared by a qualified appraiser.
  • Donation of a Vehicle: See IRS Publication 4303.
  • Keep in mind that your contribution must be made to a qualifying organization to be eligible for a deduction. So, while helping out a family in need over the holidays is a wonderful thing, your generosity won’t generate a tax deduction.

However, if you opt to give to your church – assuming your church is a non-profit – or donate goods to the Salvation Army, those donations are tax-deductible. If you are unsure if a particular organization qualifies, utilize this searchable IRS database of tax-exempt organizations.

Year end planning begins well before the year is coming to a close. It’s best to begin now and seek additional help if your individual situation proves to be a bit too complicated for you to tackle on your own.

Schedule a time to connect with me at WealthFactor and I will help you get your year end plan in place before you ring in the new year.

- Patrick Greener, Head of Planning @ WealthFactor


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