Money Move to Make Before 2021
Finance Tips

Don’t Miss Out: 9 Money Moves to Make Before 2021

Prepare for 2021 with a few money moves that will give your finances a leg up in the new year. Whether you are preparing for tax season, managing your investments, or making decisions about your retirement and health savings accounts, these tips will help you get the most out of your money.

1. Make Charitable Donations Before December 31

When The Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus bill was enacted in 2020, it increased tax deductions for eligible donations to charity. This is a significant change from the 2017 reforms, which doubled the standard deductions for individual and joint filers and reduced the percentage of taxpayers who itemized deductions from 35% to 6%. That all meant 95% of taxpayers could no longer write off charitable gifts. 

The CARES Act has introduced two temporary changes to the tax-deductible donations. One is a universal deduction for 90% or more standard deduction taxpayers, and the other increases incentives for the remaining high-income givers and corporations.

Universal Deduction for Donations Up to $300

Included a one-time $300 above the line deduction that applies to all charitable contributions made in cash that can be deducted from your taxes. However, joint filers will not get to deduct $600, as the deductions caps at $300 per tax return, whether it is individual or joint. 

Raising the Charitable Giving Deduction Cap

The charitable deduction will temporarily increase from 60% of their adjusted gross income to 100% for individuals and joint filers for high-income earners. Corporations who make cash gifts will see an increase from 10% to 25% for 2020.

All donations must be made by December 31, 2020, to qualify for the CARES Act adjustments. 

* 60% of the AGI limit is for giving to 501(c)(3) public charities. The deductibility of gifts to 501(c)(3) private foundations is capped at 30% and was not included in this legislation.

2. Use Credit Card Reward Points before they Expire

According to a recent study, 52% of consumers let their credit card rewards expire! You can avoid leaving money on the table by redeeming those points or finding alternative ways to reap the rewards of your spending. 

Travel Points and miles have been a big concern for consumers in 2020, a year when staying at home has been a rallying cry in the charge to defeat COVID-19. Fortunately, there are alternative ways to redeem travel points. You need to check in with your credit card provider to see what is available to you.

Before you begin: 

  • Check to see if your rewards expire
  • If they do expire, contact your credit card company about alternative ways to redeem.

We looked at many examples of alternative ways to redeem reward points and miles:

  • Convert miles to cash
  • Convert points to cash
  • Trade-in points or miles for a Gift Card
  • Redeem points for qualified online purchases 

3. Unemployed in 2020, Plan Ahead For Your Tax Bill

If you received unemployment in 2020, as a record number of Americans have, those benefits are taxable.

In January 2021, everyone who received unemployment benefits will receive a 1099-G Form from the agency that paid their benefits. This form includes the total amount of benefits received in 2020 and the amount, if any, that was withheld to cover taxes. You can report the information on this form along with your W-2 income when you file your 2020 tax return.

According to the IRS, taxable benefits include state-provided unemployment insurance and any special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.

4. Use up FSA Funds

Many Health Savings Account (FSA) funds expire annually. That means if you don’t use them up before the end of the year, you’ll lose them! Some employers offer slightly more flexibility and give a two-and-a-half-month grace period (until March 15, 2021, rather than December 31, 2020), while others let you roll $500 into the next year.

Regardless of the flexibility on your FSA, it’s a good idea to plan out how you plan to spend any remaining funds ASAP.

Obvious uses for these funds are doctor appointments, prescriptions and other medical services, but there are plenty of health related things you can purchase with your FSA

5. Keep Your HSA Organized

Unlike FSA funds, HSA savings do not expire. You can use them at any time in the future without a reimbursement deadline. However, you have until April 14, 2021, to your 2020 contribution, so it’s not a bad idea to make a plan for how much you plan to deposit. 

The 2020 maximum is $3,550 for self coverage and $7,100 for families. Add an additional $1,000 if you are over 55 by the end of 2020.

Even if you don’t plan to use your HSA anytime soon, it’s a good idea to organize this year’s receipts and keep a tally of HSA eligible-expenses. You may decide to submit them for reimbursement later on, and having this information organized and at hand will make it much easier to do.

6. Ditch Underperforming Investments Before December 31

Sometimes called “tax-loss harvesting,” this strategy advises that you sell investments that have fallen below their original purchase price before December 31 then use the losses to offset your gains or buy back the stocks at a later date. 

In the simplest of terms, if you purchased a stock in January for $8,000 that is currently undervalued at $4,000, you can sell the stock for a $4,000 loss that you can then use to offset a $4,000 gain on your more successful investments. When you offset a gain with a loss, you end up paying less in taxes. 

It’s important to be cautious with this strategy because there are a few rules you’ll need to follow:

  • The transaction must settle by December 31 to apply for the 2020 tax year, which means you’ll need to sell a few days beforehand to ensure the sale is complete in time.
  • If you plan to repurchase the stock, you have to wait to do it. The SEC Wash Sale rule says that if you buy more of the same stock within 30 days of the sale, you forfeit the capital loss.

7. Prepare for 2021 Minimum Distributions on Your Retirement Accounts

The CARES Act allowed retirees to skip required minimum distributions from IRAs and other tax-deferred plans in 2020. But it’s doubtful that Congress will waive RMDs in 2021, so retirees 72 and older will be required to take them next year. Luckily you have a few options:

To qualify for a charitable donation tax break, you must transfer the from your IRA directly to the charity. You can’t deduct the contribution, but it will reduce your adjusted gross income, which could make you eligible for tax breaks tied to your AGI, lower the taxes on your Social Security benefits and reduce Medicare premiums.

8. Take a 401(k) Hardship Withdrawal For Qualifying Expenses.

2020 was a challenging year for our economy, and individuals and families sustained the impact. While it should always be used as a last resort, it is possible to make a hardship withdrawal on your 401(k) if your employer allows it. 

A hardship withdrawal allows you to withdraw retirement funds early and penalty-free, but only for certain specific expenses. Things that qualify may include:

  • Certain medical expenses
  • Home-buying payments for a principal residence
  • Up to 12 months’ worth of tuition and fees
  • Costs to prevent being foreclosed on or evicted
  • Burial or funeral expenses
  • Certain expenses to repair casualty losses to a principal residence (such as losses from fires, earthquakes, or floods)

A hardship withdrawal is a serious decision, and it’s always a good idea to exhaust other options first. Nevertheless, it is good to know that it is an option if your employer offers it. 

9. Pick Up Capital Gains if You’re in a Low Tax Bracket

If you are in a lower tax bracket (10% to 12%) or experienced significant changes to your income in 2020, now might be a good time to sell those stocks that have appreciated significantly in value. This is a particularly savvy strategy if your capital gains tax is likely to be zero when you sell. You’ll pocket the capital gains with little or no tax liability.

Changes to income:

  • Temporarily unemployed
  • A salesperson whose income varies from year to year
  • Between the ages of 55 and 70 and might soon be transitioning into retirement or are already retired

Unemployment changes or changes to your income, like many saw in 2020, can put you in a lower tax bracket for the year, so it’s a good idea to see if your tax bracket was affected. You have a window of opportunity to sell appreciated stocks for a lower tax penalty. 

It’s a good idea to do your research before you start harvesting gains. We recommend reviewing gains on your mutual funds, thoroughly reviewing your tax return for capital losses being carried forward from the previous year, and making sure you have an accurate estimate of your tax situation for 2020. Before making any decisions, it’s also wise to consult a tax professional or financial advisor.

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