3 Financial To-Dos Before Year-End

Key Takeaways

• At the top of your financial to-do list for December is to be generous, starting with charitable contributions.
• December is a good time to conduct a year-end portfolio review.
• One non-negotiable task is taking your required minimum distribution if you are required to do so.

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar. The year is winding down, but investors still have time to improve their financial positions this year. Joining me to share our financial to-do list for the rest of the year is Christine Benz. She is Morningstar's director of personal finance and retirement planning.

Nice to see you, Christine.

Christine Benz: Hi, Susan. Great to be here.

Dziubinski: At the top of your list for December is to be generous, starting with charitable contributions. So, about 20% of charitable contributions on average come in during the month of December. What should people know if they're thinking about making a charitable contribution in 2022?

Benz: First of all, do it. But the bad news is that most people will not gain a charitable deduction because the standard deduction for them is higher than the amount that they're itemizing, and the charitable contributions go in that itemized deduction bucket. There are a couple of workarounds, though. One is, if you are over age 70.5, you can take advantage of what's called the qualified charitable distribution, which means that you can send up to $100,000 of your IRA to the charity or charities of your choice. So, if you are charitably inclined and you're over that 70.5 mark, it's usually better from a tax standpoint to take advantage of the QCD versus writing a check to a charity, and then maybe not being able to deduct it on your tax return. So, the QCD is a really great option for those who are over age 70.5.

For the rest of us who aren't over age 70.5 and are still finding that we don't have enough itemized deductions in most years to get over that standard deduction, an idea to consider is what's called bunching your deductions together. So, look at your taxes over a several-year period and find a year, identify a year where potentially you'll make larger contributions. Maybe you have something else going on in your life. Maybe you'll have a lot of medical deductions because you're doing some sort of elective procedure or something like that. But the name of the game is to try to group your contributions, your charitable contributions, other deductions together into a single year to get yourself over that standard deduction and into the itemized deduction category.

Dziubinski: Now, along the same lines in gifting. What about gifting to loved ones? If you want to do something like that, what should you be thinking about?

Benz: Well, there's a lot of confusion in this area. First of all, you can't earn a tax break for giving to loved ones. And typically, you won't be subject to tax yourself. There's a lot of confusion about this issue specifically because people have heard about these gift-tax thresholds. For 2022, it's $16,000, which means that if you give less than that amount, you don't have to file a gift-tax return, and that amount doesn't count toward your gift-tax exclusion, your lifetime exclusion. That number is going up to $17,000 in 2023. So, that's quite a generous exclusion. That means that most people won't have to monkey with this gift tax return at all, especially if you're a married couple and you're giving to, say, individual grandchildren or something like that, children, all but very generous givers will not run into having to file the gift-tax return.

Dziubinski: Got it. Now, you also say that December is, of course, a good time to conduct a year-end portfolio review, which is maybe a little bit more pressing this year considering what we've experienced. Talk a little bit about that.

Benz: Right. The big reason to think about doing that before year-end is to take advantage of some of these tax losses that many investors have in their portfolios. We have, of course, had widespread losses across the stock market, the bond market. Within your taxable account you may well have holdings where your purchase price or your cost basis is above where that security is now trading. If that's the case, you can sell it. Just be aware of the wash-sale rule, which means that you can't turn around and rebuy that very same security within 30 days of having sold it. But take advantage of the tax-loss sale possibilities.

In general, it's a good time to conduct some portfolio cleanup of those taxable accounts in particular and to do so with potentially less of a tax bill attached to making those changes. And finally, one point I would make, Susan, is that a lot of investors coming into 2022 had been really complacent about taking equity risk out of their portfolios. We've had bonds fall at the same time stocks have. So, I think there's a probably a good bet that those complacent investors, if they haven't really done anything, may in fact be still underweight safe securities relative to their anticipated spending horizon. So, look at that total portfolio's asset allocation. I think that's particularly important for folks who are in their 50s, 60s really getting serious about retirement planning.

Dziubinski: And then, lastly, Christine, there's one sort of non-negotiable that really is a must do if you haven't done it already and that is taking your required minimum distribution if you are required to do so. Who needs to take them and what should people know about that?

Benz: Right. So, this is for people who are older than age 72. They need to take those RMDs from the traditional tax-deferred accounts, so IRAs, 401(k)s, SEP IRAs. The one exception would be, if you are still employed at your employer and you are contributing to the 401(k), if you're still employed even if you're over age 72, you're not subject to RMDs, assuming you're not a major owner, a primary owner of that company. So, one thing I'd like to say is try to accentuate the positive with RMDs. There's a tax bill associated with those required minimum distributions, and there might be a little bit of sticker shock in 2022, given that they're calculated based on your year-end 2021 balances. Things were better in 2021 but try to accentuate the positive by focusing your RMDs on holdings that you wanted to do some clean up on anyway. So, maybe positions you wanted to rebalance out of because they were too large or problem children in your portfolio, securities that maybe had manager changes or were too concentrated a position. Look at all of those areas and potentially do your pairing from those positions.

Dziubinski: Well, Christine, thanks for your time today and giving us some extra to-dos because we don't have enough to do in December. We appreciate it.

Benz: Thank you so much. Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch "Are IRA Conversions in a Down Market a Good Idea?" for more from Christine Benz.