Believe it or not, another year has rounded third base and is dashing toward home plate. That said, there’s still time to make a few good plays in 2021 while positioning yourself to score more in the year ahead. Here are five financial best practices for the record books.
1. Keep Your Eye on the Ball. While there are always trading temptations, it seems as if 2021 has had more than its fair share of them. Remember the January excitement over GameStop and its ilk? That frenzy was soon followed by “SPAC-Man” Chamath Palihapitiya tweeting out “Shooters shoot” to his disciples, as SPACs started flying every which way. Tradeable memes and non-fungible tokens (NFTs) became a thing around then, too, followed by the pursuit of fluffy little dogecoins.
Our Best-Practice Advice: Instead of swinging at fast fads, we encourage you to lean into the returns our resilient global markets are expected to deliver over time. As always, this means looking past the wild throws and building a low-cost, globally diversified portfolio tailored for your personal financial goals and risk tolerances. Isn’t that your aim to begin with?
2. Watch for Fund Distributions. Even as we’ve continued to weather the pandemic storm, our forward-looking, global markets have been delivering relatively strong returns year-to-date for many stock funds. That’s good news, but it also means mutual funds’ capital gain distributions may be on the high side this year. Capital gain distributions typically occur in early December, based on the fund’s underlying year-to-date trading activities through October. The distributions aren’t taxable in the year incurred for funds in your tax-sheltered accounts, but they are for funds held in your taxable accounts.
Our Best-Practice Advice: Taxable distributions aside, staying put to earn all potential market returns is the more important determinant in our buy-and-hold approach. If you are planning to sell a fund anyway, or you were planning to donate a highly appreciated fund to charity, doing so before its distribution date might spare you some taxable gains.
3. Consider Tax Gain Harvesting. Along with relatively strong year-to-date market performance, many Americans are benefiting from historically low capital gain and income tax rates that may or may not last. Often, taxpayers view each tax season in isolation, seeking to minimize taxes owed that year. We prefer to view tax planning as a way to reduce your lifetime tax bill. Of course, we can’t know what your future taxes will be. But it can sometimes make good, big-picture sense to intentionally generate taxable income in years when tax rates seem favorable.
Our Best-Practice Advice: Be proactive. If you have “room” to take some taxable capital gains this year — and if it actually makes sense for you to take them — you may want to consider working with your tax planning team to do so. Realizing capital gains and Roth conversions are just two of the topics we are currently discussing with clients.
4. Seize the Day on Your Charitable Giving. Unlike many other pandemic-inspired tax breaks, several charitable-giving incentives still apply for 2021 but may not moving forward. This includes the ability for single/joint filers to deduct up to $300/$600 in cash contributions to qualified charities, even if they’re already taking the standard deduction on their tax return. If you’re so inclined, you also can still donate up to 100% of your AGI to qualified charities.
Our Best-Practice Advice: Charitable giving remains another timeless tactic for offsetting taxable capital gains you may want or need to report, as well as any other extra taxable income you may be incurring. And charitable organizations need our contributions as sorely as ever. So, if you’re charitably inclined, you may as well make the most of your gifts by pairing them with your 2021 tax planning.
5. Plan Ahead for Estate Planning. Holiday shoppers may not be the only ones facing supply chain shortages this year. Estate planning attorneys, CPAs, and similar planning professionals may also be in shorter supply toward year-end and beyond. In addition to the usual year-end crunch, many such service providers have been extra busy responding to a “COVID estate planning boom,” as well as to the fast-paced action in Washington.
Our Best-Practice Advice: If you’ve been thinking about revisiting your estate or tax planning activities, know that the process may take longer than usual. Especially if you’re planning for changes that are up against a hard deadline (such as year-end or April 15th), you’ll benefit yourself by giving your attorney, accountant, and others the time they need to do their best work for you. High-end estate planning, in particular, is best approached as a months-long, if not years-long, process.
How else can we help you wrap 2021 and position yourself and your wealth for the years ahead? As always, we stand ready to assist! In the meantime, if you’d like to read more from us on estate planning and charitable giving, look for our December column in the Traverse City Business News.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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