10 Year-End Financial Planning Topics to Discuss with Clients

Keywords: portfolio management, risk management, financial/
estate/retirement income planning, tax/debt management, charitable planning,
women investors, financial literacy, ESG/sustainable investing

It’s turning out to be another roller-coaster year, with the highs of reopening tempered by the emergence of COVID-19 variants. Cutting through all of this unpredictability are annual mainstays, such as year-end financial planning conversations with clients.

With new rules this year related to the pandemic, as well as several tax and retirement changes that carried over from last year, it’s not too early to get started. Having this checklist in your back pocket can make your planning conversations with clients more productive and help them stay on track.

1) Increase Retirement Contributions to the Max

Workplace accounts. Encourage clients to maximize contributions to their workplace plans to take full advantage of any employer match benefit. For 2021, the maximum employee deferral for 401(k), 403(b), and 457 accounts is $19,500, and individuals ages 50 and older can defer an additional catch-up of $6,500. For SIMPLE IRAs, the deferral remains $13,500 and the catch-up is $3,000.

Traditional IRAs. Maxing out contributions to a traditional IRA is another option. The SECURE Act repealed the maximum age for contributions, so individuals ages 70½ and older who earned income in 2021 can contribute to a traditional IRA. Modified adjusted gross income (MAGI) limits for contributions to traditional and Roth IRAs increased in 2021, so be sure to review MAGI eligibility thresholds. The maximum contribution amount to a traditional or Roth IRA remains $6,000, with a $1,000 catch-up for clients ages 50 and older.

2) Spend Flexible Spending Account (FSA) Dollars and Contribute to Health Savings Accounts (HSAs)

In 2020, the IRS relaxed certain use-or-lose restrictions for FSAs that remain in effect. Employers can extend the grace period for unused FSAs to up to 12 months in 2021. In addition, clients with dependent care FSAs can save as much as $10,500 in 2021.

Now is also a great time to discuss maximum HSA contributions with clients who have high-deductible health plans (HDHPs). In 2021, the maximum contribution for an individual HSA is $3,600 and the maximum for a family HDHP is $7,200. Plus, clients ages 50 and older can contribute an additional $1,000. You can discuss prorated contributions for clients who had an HDHP for part of 2021.

3) Assess Marginal and Capital Gains Tax Matters

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Clients on the threshold of a tax bracket may be able to put themselves in the lower one by deferring some income to 2022. Here are a few thresholds to keep in mind:

  • 37 percent marginal tax rate: Taxable incomes exceeding $523,600 (individual), $628,300 (married filing jointly), $523,600 (head of household), and $314,150 (married filing separately)

  • 20 percent capital gains tax rate: Taxable incomes exceeding $445,851 (individual), $501,601 (married filing jointly), $473,751 (head of household), and $250,801 (married filing separately)

  • 3.8 percent surtax on investment income: The lesser of net investment income or the excess of MAGI greater than $200,000 (individual), $250,000 (married filing jointly), $200,000 (head of household), and $125,000 (married filing separately)

  • 0.9 percent additional Medicare tax: W-2 earnings and self-employment income above the same MAGI thresholds as the investment income surtax (For clients with W-2 earnings above the MAGI thresholds, total Medicare taxes will be 2.35 percent; for self-employed clients, total Medicare taxes will be 3.8 percent.)

These thresholds and rates are current; however, keep in mind there is a bill pending in Congress that could change them.

4) Keep an Eye on Details of the American Rescue Plan (ARP)

This statute, signed into law by President Biden in March 2021, changed the Child Tax Credit and the Child and Dependent Care Credit (for 2021 only), as well as the taxation of unemployment compensation, and canceled student debt.

  • Child Tax Credit. In July 2021, the IRS began issuing 50 percent of this credit in six monthly advanced payments. Payments are based on 2020 income, so clients may need to reconcile the advanced payments if their income increased in 2021. Clients should review their eligibility for the credit.

  • Child and Dependent Care Credit. In 2021, the credit is fully refundable. Families earning less than $125,000 annually may claim a 50 percent refundable credit on care expenses of $8,000 for one child or dependent or expenses of $16,000 for two or more children or dependents.

  • Unemployment compensation. In 2020, $10,500 of unemployment benefits were exempt from income tax. This exemption does not apply in 2021, so if individuals received benefits but didn’t have taxes withheld, they may owe taxes.

  • Canceled student debt. Under the ARP, borrowers won’t owe taxes on student loans that are canceled or forgiven between 2021 and 2025. This relief applies to federal and private loans.

5) Review and Rebalance Portfolios

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Year-end financial planning should include a review of capital gains and losses for your clients. This process may reveal tax planning opportunities, such as harvesting losses to offset capital gains.

6) Tap into the Tax Benefits of Charitable Giving

The above-the-line deduction under the CARES Act was extended to 2021, meaning clients can deduct up to $300 per person ($600 for joint filers) for cash charitable contributions. For clients who itemize, the deduction of up to 100 percent for all cash charitable contributions is available in 2021. (Please note: This deduction doesn’t apply to cash contributions made to donor-advised funds or private, nonoperating foundations.)

Qualified charitable distribution (QCD) rules haven’t changed, so clients older than 70½ can make a QCD of up to $100,000 directly to a charity and married joint filers may exclude up to $100,000 donated from each spouse’s IRA.

7) Prepare a Strategy for Stock Options

Alternative minimum tax (AMT) exemption limits increased in 2021 to $73,600 for single tax filers and $114,600 for married joint filers. Depending on AMT projections, clients may want to wait until January 2022 to exercise incentive stock options.

8) Plan for Estimated Taxes and RMDs

  • The SECURE Act allows individuals who reach age 70½ after January 1, 2020, to wait until they turn 72 to start taking RMDs. Clients must take RMDs in 2021.

  • If clients took coronavirus-related distributions (CRDs) from their retirement plans, review the repayment option they chose in 2020. Remember, the choice to not repay all of a CRD in 2020 is irrevocable.

  • Individuals who took a 401(k) loan after March 27, 2020, will need to establish a repayment plan and confirm the amount of accrued interest.

9) Adjust Withholding and Get Ready to Repay Student Loans

Clients who may be subject to an estimated tax penalty can request that employers (via Form W-4) adjust their withholding to cover shortfalls. The IRS tax withholding estimator can assist clients.

Student loan payments, which the CARES Act paused in March 2020, are scheduled to resume in February 2022. In your planning conversations with clients, be sure to raise that, if they reduced other debt during this period, they’ll need to adjust their monthly cash flow to include student loan payments.

10) Evaluate Estate Plans

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It’s always a good idea to review estate plans as part of year-end financial planning. Depending on a client’s net worth, establishing a defective grantor trust, spousal lifetime access trust, or irrevocable life insurance trust may be an effective strategy to reduce estate tax exposure. While you review a client’s estate plan, be sure to update beneficiary designations and review trustee appointments, power of attorney provisions, and health care directives.

Be a Trusted Resource and Guide

Although this year-end financial planning checklist covers a lot of ground, it’s intended to serve as a springboard for your planning conversations with clients. It’s likely many clients will have more complicated issues to consider, but you can use this as starting point to talk through high-level issues and deadlines that are most relevant to them. Be sure to reach out proactively—and offer to collaborate with CPAs, attorneys, and other professionals they work with. This approach can help your clients reap the most benefits—and allows you the opportunity to demonstrate the value you deliver and deepen relationships.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Third-party links are provided to you as a courtesy and are for informational purposes only. We make no representation as to the completeness or accuracy of information provided at these websites.

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