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Your Financial To-Do List for December

The end of the year is a great time to review your portfolio.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. 2021 is quickly coming to a close, but Morningstar's Christine Benz thinks that there are a few steps you can take in December to improve your financial position. She is here today to discuss them.

Hi, Christine. Nice to see you.

Christine Benz: Hi, Susan. It's great to see you.

Dziubinski: 'Tis the season where people are thinking about giving. That's at the top of their list. And it's a time where we think about gifting to loved ones. What should people know about giving financial gifts this time of year?

Benz: A key thing to know is that typically there aren't any tax implications if you want to give a financial gift. So, you can gift up to $15,000 per person in 2021 without having to file a gift tax return. And the key thing I always say about gift taxes to most people is that you probably won't pay them because the combined amount that you can give to loved ones through gifts or through the estate tax exclusion, that amount is so high currently that it makes it very unlikely that even very generous individuals will run into gift taxes. You may have to file that return if you go over the threshold in a given year, but you probably won't need to pay tax.

Dziubinski: Got it. What about charitable giving this time of year? What should people know if they want to make a charitable contribution by year-end?

Benz: Well, the key thing to know is that many more taxpayers are using the standard deduction than itemizing. In order to get a tax deduction for your charitable contributions, you need to be thoughtful about how you proceed. So, a key thing to know is that if you're over age 70.5, you can take advantage of what's called a qualified charitable distribution, or a QCD, and this basically means that you take assets from your IRA and transfer them to the charity of your choice, and you can let the IRA provider work directly with the charity on this. And you can contribute up to $100,000 per year of your IRA via this QCD mechanism. The reason it's so attractive from a tax standpoint is that it reduces the amount of your balance that's subject to required minimum distributions. And that money that you shunt over to charity also escapes taxation. It's a really attractive strategy for people who are 70.5 and above, have IRA assets, and are charitably inclined.

For the rest of us who are not 70.5 but still want to get a tax deduction for our charitable contributions, the key thing to know is that for 2021, if you make a cash contribution to a charity, you can at least deduct up to $300 of that contribution if you're a single filer and up to $600 if you're part of a married couple filing jointly, and you don't need to be an itemizer. This is an above-the-line deduction. So, if you're one of the 90% of taxpayers who uses the standard deduction, you can still get a little bit of a tax break on your charitable gifts.

Dziubinski: Let's pivot off of giving for a minute and talk a little bit about portfolios at year-end. December is, of course, a good time to do a portfolio review. If one wants to do that, what should we be looking at?

Benz: As the year winds down, a key thing to be thinking about is, are there any steps that I can take to reduce my tax bill for the 2021 tax year. A key thing to be on the lookout for is whether you have any tax-loss candidates, so positions that are trading below what you paid for them. If you sell out of them in a taxable account, you can realize a tax loss that you can then use to offset gains elsewhere in your portfolio. So, take a look at that within your taxable account. It's also worth noting that for people who have gains in their portfolio and they're in the 0% tax bracket for capital gains, they can actually preemptively sell those winning securities, reset their cost basis at a higher level, and even rebuy the same security later on. So, that can be an attractive strategy, especially for people who are maybe just retired and find themselves in a low tax bracket because required minimum distributions haven't yet kicked in, that's something to consider.

For people who are looking at their portfolios broadly, I think it's a great time to take a look at whether you can do any reallocating or whether it makes sense to reallocate. Focus there on your tax-sheltered accounts where you can do all the repositioning that you want without triggering a tax bill. But I think it's a great time to compare your portfolio's current asset allocation relative to your targets. Chances are that your U.S. equity holdings are a little higher than they were at the start of the year. So, you may want to do a little bit of repositioning to get back into line with your target asset-class exposures.

Dziubinski: Christine, you mentioned RMDs, and you think that retired investors would be smart to sort of tie their RMDs with this portfolio review and examination. How so?

Benz: We often hear from retired investors, who grumble about their RMDs, it triggers a tax bill and so on. But I do think that there's a way to use your RMDs to at least improve your portfolio. So, if you have holdings that you'd wanted to sell for one reason or another, maybe you've had a manager change, or you've decided that you didn't want to have such a concentrated position in an individual stock, harvest those for your required minimum distributions. Or if you just want to get your portfolio back into balance or back into line with your target asset allocation, pull your RMDs from the category that you wanted to skinny down on anyway. So, I do think that RMDs can be tied in with the portfolio rebalancing process. You can even get these qualified charitable distributions into the mix as well. So, if you're using the QCD, you can pull the QCD from the securities that you wanted to cut back on anyway.

Dziubinski: Christine, thank you for your time today and for some things that we should be taking care of in our financial lives in the month of December. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: And happy holidays.

Benz: Thank you. Same to you.

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