Whether you’re an individual strategically planning for a comfortable retirement, or you own a small business, some year-end planning is in order. Here’s your checklist of things to do before January 1.
For many of us, 2021 can’t come fast enough. But if you want to set yourself or your business up for financial success next year, now is the time to do some important planning. Get a start with this list.
Make sure you’re on track
For individuals:
Whether or not you’re working with a financial professional, this time of year is always prime time for a comprehensive financial check-in.
If you’re managing things on your own, review your investments, update valuations, and make sure you’re headed in the right direction. If you already have a wealth manager, then it’s likely you already have a sense of where your financial situation stands and that they are on top of any necessary tweaks to your strategy.
For small businesses owners:
Now is the time to get a good sense of your company’s financial performance from the year, so you can wrap your head around strategic plans, budgets and forecasts for the New Year.
Start by bringing balance to your books. Prepare your financial statements, including your balance sheet (assets, liabilities, and equity), income statement (revenue, expenses, and profit), and cash flow statements (opening and closing cash, with cash in and out itemized).
And, just as individuals should do, make an appointment to meet with your financial or tax professional to make sure you’re leveraging all the financial strategies you can for a strong 2021.
Maximize your contributions to retirement accounts
For individuals:
Have you made the maximum contributions to your retirement accounts? If not, year-end is a great time to get this one taken care of. The total annual contribution limit for IRAs in 2020 is $6,000 if you’re under 50, or $7,000 if you’re 50 or older.
For your 401(k) plan, the contribution limit for this year is $19,500 if you’re under 50. The catch-up contribution limit is $6,500 (which can be made in addition to the $19,500).
Don’t forget to maximize your contributions to your health savings account (HSA). That max is $3,550 for individuals; $7,100 for families. Catch-up contributions on these accounts remain $1,000 for 2020 for those who are 55 and older.
Thinking ahead: The beginning of the year is actually an ideal time to contribute as much as possible to your retirement accounts, so you not only maximize your contributions, you also maximize your returns.
For small business owners:
A business owner and his or her spouse can make a maximum contribution to an individual or solo 401(k) of $57,000 for 2020, plus the catch-up contribution limit of $6,500 if you’re 50 or older.
This goes for matching contributions, as well. If you’ve established a small business 401(k) plan, you are able to make deductible matching contributions for each eligible employee of up to 25% of that employee’s compensation. The maximum contribution for both an employee’s contributions and employer matching must not exceed the individual 401(k) limits.
Make the most of losses
For individuals:
Did you lose money on investments in 2020? If so, tax-loss harvesting is a strategy that can reduce your taxes and mitigate the severity of your loss. It allows you to sell investments that are down and replace them with reasonably similar investments.
Be sure to chat with your financial advisor or wealth manager about the status of your investments. They will know the best ways to offset any losses and minimize taxes.
For small business owners:
If COVID-19 had a negative impact on your business, you may be able to mitigate some losses thanks to the CARES Act. If you qualify, you may be able to apply a net operating loss from 2018, 2019 or 2020 to income from the past five years for a potential immediate refund. Options include amending past returns or carrying losses forward for future tax years.
Talk with your tax advisor to determine the best course of action.
Make charitable contributions
For individuals:
If you itemize deductions on your tax return, then you should consider donating to your favorite causes by the end of the year. You can do this by donating appreciated assets, cash, or using a qualified charitable distribution (if you are at least 70 ½ and have a traditional IRA).
This year, it’s good to know that the CARES Act eliminates the 60% deduction limit. Your financial advisor or tax professional will be able to advise you on the specifics of contributions that are best for your financial situation.
For small businesses owners:
On average, small businesses donate 6% of their profits to charity. If you still have some catching up to do for 2020, first discuss with your tax advisor to ensure your gift fits the many IRS rules for deductions. And remember that donations to charity can come in more ways than cash: You can also give equipment or property.
Contributing to charity is a great end-of-year strategy for minimizing the tax liability of your business, but it comes with other benefits, as well: Connecting you to the community; aligning your business with other organizations that share your values; and helping you to develop relationships with potential partners.
Start Planning for Next Year’s Taxes
For individuals:
Just about everyone would like to minimize taxes, and getting a headstart on planning is key to making that happen. Meet with your tax advisor by the end of the year to discuss your tax situation and your 2021 outlook.
It’s true that control of the Senate remains unknown until the runoff election in Georgia on January 5, which makes planning more difficult. But it’s still a good idea to get with your tax professional to understand the facts as they stand, so you can make informed decisions. Considering that there may be significant changes to capital gain tax, estate tax, and charitable giving tax benefits, you’ll want to weigh your options with a trusted advisor.
For small business owners:
Similar to our advice for individuals: Talk to your tax professional by the end of the year to plan for reducing your tax liability in 2021. Once you have some sense of the tax outlook for 2021 for your business, put a plan in place for paying your taxes so that it’s as least-burdensome as possible — whether you manage this via quarterly estimated payments, or by saving a certain amount each month for one big tax bill.
In addition, discuss whether your business qualifies for a different tax treatment going forward (for example, should you switch from a S Corp status to C Corp?). If your business was affected by the pandemic and you received support as part of the CARES Act, work with your tax advisor to understand any tax implications: Make a plan for paying back payroll taxes and make sure you’re aware of tax implications of PPP loans (there are a few, even if your PPP loans are forgiven).
Ready to get your end-of-year financial planning and analysis taken care of? At Ironwood Wealth Management, we serve individuals and small businesses, and can help with everything from comprehensive planning and portfolio management, to small business and tax planning. Let’s get started today.