1. Take advantage of family gifts.
Anyone can give up to $ 15,000 ($ 30,000 for a married couple) annual bargain tax-free gift to as many people as he or she wishes, without counting toward the taxpayer’s lifetime estate and gift tax exemption. One possible gift is a 529 plan for a child or grandchild. Special rules call for a transfer of five times this amount, which means that a couple can give a gift of $ 150,000 per beneficiary (but not an additional gift for the next four years).
2. Maximize input tax contributions for 401 (k) s and HSAs.
Input tax contributions to employer-sponsored 401 (k) packages in 2020 are capped at $ 19,500 per person, with an additional make-up price of $ 6,500 for taxpayers over 50. Taxpayers with high deductible health insurance plans have health insurance accounts available for the contribution of pre-tax dollars. Growth within the HSA is income tax-free, as are withdrawals when used to qualify healthcare spending. Contributions in 2020 are capped at $ 3,550 for an individual, $ 7,100 for a family, and a catch-up fee of $ 1,000 for individuals over 55 years of age.
3. Look at the educational payment options.
Payments can be made directly to qualified educational institutions for a student’s tuition fees without counting toward annual gift limits or lifelong estate and gift tax exemptions. Tuition fees for primary, secondary, university and college courses are included, but not other costs such as room and board or books and supplies. To qualify, payment must go directly to the institution, not the student or the student’s parents.
4. Explore long-term care options to manage financial risk.
Long-term care insurance helps manage financial risk to protect life savings and assets, and can allow the payment of long-term care bills without depleting those assets. In some cases, it is possible to create a no-money-loss plan so that heirs can get rewards and a small death benefit back if care has never been paid. In this way, these types of policies become near-free protection against possible future maintenance costs and potentially offer double-digit returns with little or no downside risk.
5. Prepare for the unexpected with a liquidity plan.
A solid cash flow plan for unexpected cash needs, such as tax payments, medical or other family expenses, or even buying a lifestyle, can be an important part of an overall wealth plan. Ask if a cash offer can be made on an expensive item without disrupting the current investment portfolio. Using securities as collateral for a line of credit allows access to liquidity without disrupting the portfolio and potentially generating capital gains.
6. Review the entire balance sheet, not just the assets.
Business and personal balance sheets often overlap for high net worth individuals. When reviewing balance sheets, consider borrowing assets such as investor real estate, yachts, or airplanes, and how leverage can affect the overall tax picture. Also, review floating rates on existing loans on major lifestyle assets and assess whether an interest rate swap would be appropriate given the lower rate environment. Also identify any Libor based loans as the interest rate offered by the London Interbank will expire by the end of 2021.
7. Time for charity.
Taxpayers making a breakdown can deduct 20% to 60% of Adjusted Gross Income, depending on the type of gifted asset and whether the gift is directed to a public charity or private foundation, up to a maximum of 60% the AGI for monetary gifts to non-profit organizations. Only for 2020 did the CARES law increase this limit for itemizers to 100% of the AGI and also allowed a deduction of 300 USD above the line for non-itemizers. Make sure the gifts are timed appropriately so that they can be received by the charity and recorded by December 31st. Keep in mind that gifts with assets other than cash may take longer to process.
8. Select the right item to give to charity.
Giving away valued shares held for more than a year can benefit both the recipient’s charity and the taxpayer. A taxpayer who donates the stock receives a deduction for the market value of the stock at the time of the donation, but no capital gains tax that would apply if they sold the stock first and then donated the proceeds.
9. Consider reaping tax losses.
It is important to understand the unrealized capital gains and losses in a portfolio and to take advantage of all opportunities to minimize taxes by selling assets at a loss and shifting clients’ strategies to investments that may benefit them more in the current market environment . Normally you never want to sell an investment just for tax reasons, but can make the decision as part of a realignment and a stress test of your own portfolio.
10. Analyze the capital gains distributions.
Funds typically distribute capital gains at the end of the year. The distribution corresponds to the proceeds from the sale of shares or other assets by the fund managers during the tax year. These distributions can be made if you have no total profit in the fund itself or even if you hold a fund at a loss. The analysis of when and how much a fund will pay out as capital gains can provide information on whether it makes sense to keep the fund on time or to fold it and swap it for a more tax-efficient vehicle.
In order not to wait until the last minute, in this case New Year’s Eve, tax experts at Wilmington Trust have put together a checklist for advisors with tips to help clients preserve or improve their wealth.
“If 2020 has taught us anything, the future is unpredictable,” says Wilmington Trust, which provides wealth and institutional services to the M&T Bank.
It is important to scrutinize wealth plans, liquidity solutions, and investment portfolios to see if they can withstand the stress of scenarios that differ from those expected.
Check out the gallery for 10 tax steps to consider before the end of the year.
– Based on ThinkAdvisor: