A Look at What you Should Do in the Fourth Quarter

Entering the year, many thought 2020 would be a year of vision and purpose. No one knew a global pandemic would shake the foundations of the way we work, learn and play. The tumult of 2020 left an indelible mark for sure. But as we look to close the books on 2020 and move into 2021, financial advisors say the more things change, the more they stay the same.

We asked local experts – Tanner Murphy, a financial advisor with Laveer Wealth Management; and Nick Courville, Chris Solomon and Jerrod Tinsley, CPAs and partners at Heard, McElroy and Vestal – for their advice about planning and preparing our finances in the fourth quarter of this year.

What should we be doing right now to finish our financial year strong?

Murphy: Investors should stick to the fundamentals. They should not let nearterm volatility derail them from their goals. They should stay diversified and know how much risk they are actually taking in their portfolios. Keeping a long-term view or a view equivalent to the investing time frame will be key. They should be wary of emotional moves that cause them to make drastic shifts to investments due to volatility or worries of election results. They should take advantage of low-interest rates and consider refinancing mortgages where appropriate. They should ensure they are putting enough into their retirement plans to get the maximum employer match available. They should maintain an adequate cash reserve to cover emergencies or job loss. Make sure to contact your financial advisor to understand the best course of action for you.

HMV: Review your current year spending and compare it to your budget. If you don’t have a budget, begin tracking your expenses now in order to start next year with a monthly budget more easily.

Review your long-term savings plan. If you do not have a plan, develop one. Having money deducted from your paycheck every month is great, but it’s not sufficient. You need a long-term plan to know whether or not you are on track to meet your retirement goals. Develop a plan and review it regularly to ensure your stay on track.

Contribute as much as you can, as soon as you can, to tax-advantaged investment accounts. Contributing to tax-advantaged accounts like traditional IRAs, Roth IRAs, and 401(k) plans, earlier in the year rather than at the end of the year gives you that much longer for the tax-advantage to work for you. An extra year of tax-deferred or tax-free growth can make a huge difference in when you can retire and/or how much retirement income you will have.

Manage tax bracket creep. If you are creeping up on the next tax bracket, look for ways to defer revenue into next year or increase tax deductions for this year.

With the new, higher standard deduction, bunching itemized deductions into one year is an excellent way to manage your income tax expense. For example, the standard deduction in 2020 for a single person is $12,400. If your only itemized deduction is charitable contributions and you usually give $1,000/month, your itemized deductions will be $400 short of the standard deduction. So you received no tax benefit for your charitable contributions. However, suppose you are in the position to, in effect, “prepay” your monthly charitable contributions for January and February 2021, before Dec. 31, 2020. In that case, you will increase your tax deduction from $12,400 to $14,000: This will reduce your taxable income for 2020 by $1,600. Then for 2021, defer your charitable contributions to 2022. The idea is to “bunch” as many deductions into one year to exceed the standard deduction for that year.

What changes to the tax laws do we need to be aware of?

Murphy: First, there is relief for retirees. The required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) have been suspended for 2020. Your RMD is the amount that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans after you reach age 72 (or, in some cases, after you retire or inherit an account). The age was recently increased from age 70 ½ to 72.

Then there is relief for accumulators.

The 10 percent premature distribution penalty for retirement accounts does not apply to 2020 coronavirusrelated distributions up to $100,000.

Coronavirus-related distributions can be rolled back to an eligible retirement plan or IRA within three years. Also, the 2020 loan limit on 401(k)s for coronavirusimpacted individuals has increased to $100,000 or 100 percent of the vested account balance. The due date for repayment is delayed one year.

HMV: There are a number of tax implications brought about by both the Families First Coronavirus Response Act and the CARES Act. All individuals and business owners will need to consult with their tax advisors regarding the payroll tax credits, payroll tax deferrals, mandatory COVID-19 related leave days for employees, and all Paycheck Protection Program-related matters. The CARES Act also has a technical correction that addresses the appropriate depreciable life of Qualified Improvement Property. Any taxpayers that placed interior improvements to commercial buildings from Jan. 1, 2018, through present-day should consult with their tax advisors on the benefits that this correction may bring them.

Are there things we should do before the end of the year for our taxes?

HMV: Absolutely. For business owners, be sure to go through your fixed asset listing to ensure you’re only reporting those assets that you still own and have placed in service. Too many times, disposed assets are left on depreciation schedules for which personal property tax is assessed. Business owners will also want to consult with their tax advisors regarding any potential tax credits or deductions that may be available to them based on their 2020 business activity. Those businesses that received a PPP loan will want to be sure that their PPP loan forgiveness application is in good shape before submitting it to their bank.

Individuals will want to make sure that they have made all their contributions to their retirement accounts and health savings accounts. For those who are recently married or changed jobs, you will want to make sure that your federal and state income tax withholding is sufficient for the wages you received during the year. We see filing status and job changes as one of the top reasons why individuals do not have enough (or have too much) income tax withheld each year. Now is the perfect time to schedule time with your tax advisor to review your year-to-date paystubs to ensure you have the appropriate amount of income tax withholdings for 2020.

Murphy: If you are 70½ or older, consider paying your charitable expenses directly from your Individual Retirement Account (IRA). This is called a Qualified Charitable Distribution (QCD). Up to $100,000 of distributions from IRA’s paid directly to qualified charities are excluded from taxable income for that year. Also, consider using any additional cash to fund your retirement accounts for the year. Always consult a tax advisor regarding any changes you make or for clarification of tax laws and how they apply to your individual situation.

How has the COVID-19 pandemic changed the financial outlook for the short term? What about the long term?

HMV: COVID-19 has created many short-term and long-term challenges. While we are experiencing the challenges of an event like COVID-19, we can’t help but think it has altered both the short-term and long-term financial outlook. But when we step back and look at the big picture, the financial outlook really hasn’t changed much at all. There have always been global crises, and there always will be. As long as we have an economy built on capitalism’s tenets and free enterprise, the financial outlook is good. Yes, there will be ebbs and flows, expansion and contraction, just as after fall comes winter and after winter comes spring. Unfortunately, the financial markets aren’t as predictable as the seasons of the year.

Murphy: Coronavirus has definitely impacted near-term economic growth and market performance for the year. The market has been much more volatile this year as uncertainty due to coronavirus implications has been high. This uncertainty has caused lower consumer spending (the largest factor in economic growth) among other issues.

History has shown that financial markets tend to be resilient over the long-term. We, as a country, have weathered many tough times and tragedies. Understanding how we deal with coronavirus with solutions like more efficient testing or a vaccine should help us return closer to normal sooner.

What is the financial forecast for early 2021?

Murphy: Many projections have economic growth returning in 2021 when compared to 2020. While economic growth and stock market performance don’t always go hand-in-hand, it could help bolster market performance. On the positive front, chances of a vaccine and fewer issues from coronavirus could help the markets. On the negative front, no vaccine and continued coronavirus issues, as well as ongoing political unrest and division, could keep the markets more restrained and continued volatility. As mentioned, please consult a financial advisor on your specific strategies prior to taking any action.

HMV: Investment and financial planning author Larry Swedroe often says, “My crystal ball is always cloudy.” No one really knows what tomorrow will bring. However, based on what we know at this point, continued low-interest rates and continued market volatility are a pretty good guess for 2021.