IT’S FIVE WEEKS until the end of the year—which is five weeks during which you can do some valuable financial housekeeping. Here are seven recommendations:
1. Give tax efficiently. In the past, charitable contributions were a direct and easy way to lower your tax bill. But with the recent tax law changes, which include a big hike in the standard deduction and limits on some itemized deductions, this strategy doesn’t work as well. My suggestion: Consider opening a donor-advised fund and making contributions using an every-other-year strategy, so you’re more likely to get a tax break for your generosity.
2. Claim your Social Security account. The Social Security Administration has an excellent website that provides easy access to your benefits statement. I urge you to sign up for two reasons.
First, to build a complete retirement plan, you need to know what size benefit to expect from Social Security. If you’re married, or ever were married, you’re likely entitled to a spousal benefit, which you’ll want to research as well.
Second, Social Security is, unfortunately, susceptible to fraud. There have been cases where thieves have successfully applied for and received benefits under someone else’s name. No one is immune to fraud. But when you set up your online account—and secure it with two-factor authentication—you lower the likelihood of this happening.
3. Audit your portfolio (1). Around year-end, the conventional wisdom is to conduct tax-loss harvesting—that is, scour your taxable investment account for losses in an effort to trim your tax bill. While that’s a worthy exercise, I also recommend a different kind of harvesting: Thin out the chaff—the inferior or overpriced investments—that may be hiding among your investments. While everyone hates taxes, don’t let the tax tail wag the investment dog. In other words, don’t be so allergic to paying capital gains taxes that you suffer for prolonged periods with subpar investments.
4. Audit your portfolio (2). In the past, I’ve compared mutual fund companies to junk food manufacturers, constantly churning out new, unnecessary and unnecessarily expensive variations on existing funds. Over time, especially if you work with a broker, these types of investments may accumulate in your portfolio.
In an article last year, I outlined a four-part litmus test for evaluating investments. My recommendation: If you have some downtime over the holidays, take an hour to scrub your portfolio using my litmus test. If an investment doesn’t make any sense to you, contact your broker and ask him or her to explain it. If your broker’s explanation doesn’t make any sense, consider selling.
5. Audit your portfolio (3). After several years of mostly steady gains, markets in the U.S. have become more volatile over the past two months. While this can be unnerving, I see a silver lining: It’s a gentle reminder that the stock market can go down as easily as it can go up—perhaps more easily.
Consider the performance of some of the market’s favorite stocks this year: Apple is down nearly 26% since the beginning of October, Facebook is down more than 39% since the summer, and chip maker NVIDIA is down a sobering 50% from its high. No one can predict where the market will go next, but you definitely can reduce risk by ensuring you don’t have outsized exposure to any one investment.
6. Hedge your bets on estate taxes. One benefit of the 2017 tax overhaul is that federal estate taxes now impact far fewer families. Still, as I pointed out last week, there’s no guarantee this will always be the case. If you have substantial assets, I still recommend making regular annual gifts to your children.
In 2018, you can give $15,000 to as many people as you want without any tax consequences. If you have a multi-million-dollar net worth, this may not sound like a lot. But suppose you’re married and have three children. You could give your children a total of $90,000 ($15,000 x 2 parents x 3 children) every year without any impact on your lifetime federal estate tax exclusion.
7. Visit your accountant. During tax season, accountants are so inundated with work that they can barely keep their heads above water. At this time of year, though, they’re happy to have visitors. My suggestion: If you use a CPA, take an hour to sit down with him or her and revisit your 2017 tax return. Ask your accountant to walk you through it, and ask for observations and recommendations. Understand the key drivers of your tax bill and ask what steps you could take to reduce it this year. Even if you don’t walk away with any real savings opportunities, it’ll be an hour well spent, because it will give you an opportunity to learn the basic mechanics of a tax return.
Adam M. Grossman’s previous blogs include Deadly Serious, Five Messy Steps, Hole Story and Seeking Zero. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.