End of year tax checklist

The end of the calendar yes is quickly approaching, and that means it is time to run through our year-end tax checklist. The simpler the better.

Here are a few important items to review and actions to take.

Year-End Financial and Tax Checklist

Estimate total annual income

Q4 dividends, interest, and capital gains are not yet on the books, but Vanguard (and others) usually publish an estimate in early December.

As an example, for 2019 Vanguard will publish an estimate on Dec 10th for most funds.

when vanguard will release year-end capital gain and dividend estimates

I will make a projection based on Q1-Q3 data now for total incomequalified dividend income percentage, and US / Foreign earned income split, and then adjust as necessary / as new information is available.

Determine Your Marginal Tax Rate

From income, we can quickly determine our marginal tax rate. (See our full overview of the federal tax brackets.)

The marginal tax rate is what guides us in most decisions related to tax optimization. When our current marginal tax rate is high, it is a good time to take deductions from 401(k), IRA, and HSA contributions. When the marginal rate is low, Roth contributions or conversions are better.

Ensure SEPP and RMD distributions are complete

SEPP / 72(t) IRA withdrawals and Required Minimum Distributions have rather unpleasant penalties if the necessary withdrawals are not completed accurately and timely. Review SEPP and RMD distributions to avoid this unpleasantness.

Review Asset Allocation & Rebalance

A good asset allocation stands the test of time through periodic rebalancing. I include Roth Conversions, Capital Gain / Loss harvesting, and cash flow management as part of the rebalancing process.

Our target asset allocation has been about 90% stocks / 10% bonds and 75% US equities / 25% International for as long as I can remember.

Now is a good time to review and rebalance if necessary. I use a combination of a spreadsheet and Personal Capital(affiliate link) for this process.

asset allocation chart

Our 2019 asset allocation chart

Finish All Roth Conversions

Any Roth conversions must be completed by Dec 31st. Since Roth conversions can no longer be recharacterized post-TCJA, I will schedule these after I know our “final estimated” total income and amount of unqualified dividends (taxed as ordinary income.)

The actual distributions and qualified dividend income percentage of Mutual Funds / ETFs may be different from the early-December estimate, so some educated guesswork is sometimes necessary.

Harvest Capital Gains / Losses

Similar to Roth conversions, all capital gains/losses must be realized by Dec 31st. I will schedule these after I’ve completed a Roth conversion (if applicable.)

Related: see thoughts on how to prioritize Roth conversions or Gain harvesting.

I also have a template that shows the step-by-step process for harvesting gains. Submit the form here and I’ll email it to you.

Make final 401k contributions

Ideally, 401k contributions are on auto-pilot and you are able to contribute at least enough to receive a full match from an employer (if applicable.) See the current and past year 401k contribution limits.

Verify all is well, and make necessary adjustments including desired Roth / Traditional allocation.

We make solo 401(k) contributions manually, and the final “employee” contribution must be made by Jan 30, so December is when I ensure we have the requisite cash on hand. (If you are self-employed, the new solo401(k) docs need to be in before end of year!)

Plan for IRA and HSA contributions

IRA and HSA contributions need to be completed by the tax deadline, often April 15th of the following year.

See IRA contribution limits and HSA contribution limits.

If we haven’t already made full contributions for the year, I plan to ensure we have the cash available. This might mean selling stock now or Q1, realizing a capital gain in whichever tax year is more favorable.

Be Sure to get the Full Child Tax Credit

This is only an issue for those of us with no US-taxed earned income, such as retirees and expats who claim the FEIE.

A portion of the Child Tax Credit (CTC) is refundable, but only if you have earned income. If you don’t, it is necessary to ensure a positive tax burden and use the CTC to bring total tax back to zero rather than get a refund. A Roth conversion or capital gain harvest can solve this problem easily but must be done by Dec 31st.

Schedule Healthcare, Enroll in ACA coverage for next year

Most ACA and employer health insurance plans have a deductible. If you are close to hitting it for the year, December is a good time to schedule Doctor visits and planned care. Free knee surgery in December is possibly preferred to expensive knee surgery in January (or it may be better to meet the deductible in January. The key is planning ahead.)

FSA and HRA dollars may also need to be spent.

For ACA enrollment, results from these end-of-year health checks can inform what level of health insurance coverage we may want for next year. Healthy as an ox? Bronze with HSA. Something isn’t quite right? Silver plan with high CSR subsidies combined with income optimization for the year.

Make Tax-deductible Purchases & Donations / Shift Income to Next Year

For business owners / self-employed, December can be a good time to make necessary purchases. Or it can be a good time to shift income into the future if you expect lower income next year (e.g. bill you clients with a due date of Jan 15 instead of Dec 31.)

I will possibly make a new laptop purchase as a Christmas gift to myself because I believe our marginal tax rate this year will be higher than next year. Were it the other way around, I would just get myself a Januarymas gift.

If you are itemizing (rather than claiming the standard deduction) you can also deduct charitable donations (also by Dec 31st.) Gifting appreciated shares means no capital gains taxes for the gifter or beneficiary.

Consider getting an (almost) free vacation for paying your taxes

Either through paycheck withholding or via quarterly estimated tax payments, the IRS collects their money upfront.

For the self-employed, it is a simple process to pay those taxes with a credit card (or four) to get free vacations. (See how Uncle Sam paid for our Hawaii trip. I paid $56 in fees to get over $1,000 in free hotel nights and free breakfast with beach view.)

For employees, you can reduce withholding with an updated W4, and then make quarterly payments as the self-employed do to square up.

Consult with your CPA or Tax person

Tax and investment management are superpowers that anyone can develop, but it takes some time and experience to get there. I learned it all one step (and mistake) at a time.

A good CPA or tax guy/gal who also enjoys the role of educator can really help. December is a good time to meet with them for the first or umpteenth time. You can even bring this list.

I’m sometimes asked if I can help – I do my best to take on that educator roll through this blog and also on the forum. I created a consulting page for those who want something more.

Enjoy the Holidays

We may spend a lot of time thinking about money and taxes on this blog, but they are small topics in the grand scheme of things.

Have a great holiday season with friends and family, wherever you may be. In January we will be doing our own holiday trip to ski in Japan.

Happy Holidays!

Actual photo of me in the hot spring after a day on the slopes.

What else should be on a Year-End Financial and Tax Checklist?