Financial Planning Guide: What to discuss (Part 2)

Year-End Review - What Should Your Financial Advisor Discuss? (Part 2)

When working with a financial advisor, there are two important reviews you want to be included in your fees – the annual review and a year-end review. The annual review should cover your financial plans and adjust for any life or financial goal changes you have in mind. The year-end review should prepare you for tax season so that you are not caught off-guard by high taxes based on actions your financial advisor did – or did not – take on your behalf. 

In this two-part article, we reviewed the coordination between your financial planner and your tax planner, whether converting your IRA may be a good option, explain tax harvesting, and planning for required minimum distributions from your retirement accounts in Part 1. Part 2 covers charitable contributions, capital gains distributions, and reviewing your withholdings when conducting your year-end review with your advisors.   

How Charitable Contributions Can Impact Your Taxes

Charitable contributions can be a fun and impactful way to reduce your tax liability. If you are in a financial position to donate to your favorite charities, your financial advisor can assist you with the process.  Begin by discussing how much you want to donate and determining what kind of tax benefit you may receive. 

In past years, tax laws allowed people to donate money where they wanted. This worked well for those who itemized their deductions. When tax laws change and the standardized deduction was increased, this meant some donations may not have seen a difference in their tax liabilities. 

Your financial planner may recommend donating stocks or mutual funds, rather than cash, to improve your tax deductions. When you gift in this manner, rather than sell long-term appreciated shares, you may be able to take a deduction for the fair market value of your shares, allowing you to avoid being taxed on the long-term capital gain.

If your goal is to reduce the value of your taxable estate, your financial planner could recommend gifting up to $30,000 a year for a couple ($15,000 per year for a single person) without tax consequences to you or the recipients. This gifting option allows the receiver to benefit from the receipt of the money now rather than waiting until after your death when the money may be delayed through the process of distribution of your estate. Some people choose this gift option to give money to a family member for college or to help them buy their first house. 

Some people may prefer to write out a substantial check to their favorite charities instead of gifting shares or mutual funds. In this situation, checks can be written directly from your retirement account so you do not pay taxes on the money. Charitable IRA contributions have a $100,000 limit. When you choose to gift money from your retirement account, it has the added benefit of reducing the required minimum distribution amount at age 72, if that is needed. 

Cost Basis Must Be Documented 

Cost basis is the original value of an asset, such as stocks or shares, for tax purposes. The cost basis can be arrived at by determining the original purchase price, then adjusting it for stock splits, dividends, and return of capital distributions. The capital gain is the difference between the asset’s cost basis and the current market value. 

When you have owned a particular stock or shares for a long period of time, it is possible the original cost basis for that stock was not documented. If your advisor has changed since the original purchase, that cost basis information may not have been provided either. More recent purchases are required to have that info, but that was not the case 20 years ago, for example. 

Why is this important? If there is no cost basis, then that number will be zero, making the sale of that stock 100% taxable. Make sure you have the cost basis on all your stocks and shares. Cost basis is not important for the stock you hold in your IRA account. 

Check Your Withholdings 

As you are discussing withdrawing money, moving money, and gifting money to improve your tax liability during your year-end review, it is important to plan ahead by withholding money to pay taxes when they are due. 

Let’s use an example that you withdrew $25,000 from your IRA during the year. If you do not withhold taxes at the time of the withdrawal, make sure you set aside that dollar before the end of the year. A better option would be to set up withholding at the time of the withdrawal, in this example $5,000, so you get a credit on your taxes for paying that. If you need to make any adjustments to withholding or distributions, discuss this with your financial planner and tax planner to do before the end of the year. 1099 forms and W-2s get printed in January, so everything you do by December 31 is documented for the tax year.

Capital Gains Distributions 

In part 1 of this article, we discussed tax harvesting, which occurs when securities are sold at a loss to offset a capital gains tax liability. It is typically used to reduce the amount of federal income tax due to short-term capital gains. Your financial planner and tax planner can work together to find the best recommendations for your circumstances.  

Mutual funds may also try to harvest losses, especially in a turbulent year like 2020, to protect themselves. This may not be a problem you have encountered with your mutual fund in the past, but unusual market circumstances can trigger unusual events. 

Example scenario: You own ABC mutual fund (not a real fund). They bought Apple stock many years ago when it was $1/share and sold it when it was $500/share.  Now let’s say you bought ABC mutual fund in January 2020 and did not participate in all those gains over the years. This year, ABC fund decides to issue a capital gains distribution from the past 20 years of growth which offsets all the gains and losses within the fund over the years they held it. The loss is $100,000 and as a result, you get a 1099 form saying you now owe $35,000 in taxes because the mutual fund sold off the Apple shares. Even though you didn’t get distributions from the years Apple was growing, you still owe the taxes because you owned the stock when it was sold by ABC mutual fund, so you owe those taxes. 

If you know that is going to happen, your financial advisor should recommend you sell the Apple stock before ABC mutual fund does, then buy it back after the sale if you want to own Apple. Or, depending on your financial circumstances, you can wait 31 days and claim the $100,000 in losses on your taxes. If you had capital gains in other areas, this loss may help offset that to help reduce your federal tax liability.

Working Together to Reduce Unpleasant Surprises

When you work with a fiduciary, such as a CERTIFIED FINANCIAL PLANNER™, they are required to act and offer advice in your best interest, not their own. This example scenario is a good example of how a professional financial planner can assist you throughout the year with your financial goals, especially by conducting a thorough annual and year-end review of your accounts. 

The other important benefit to working with a fiduciary who also works with your CPA or tax planner is to help your planner know what your tax liability will be so you are not unpleasantly surprised. When a financial planner fails to work with your CPA, then makes recommendations that do not benefit your tax situation, you may blame your CPA for delivering the bad news. In some circumstances, the fault is actually with the financial advisor. 

It is important to know that sometimes your CPA will have another idea for your financial planner that will help offset taxes with losses the client has been carrying that the advisor didn’t know about. Good CPAs are working on tax planning in December to avoid negative surprises. 

For example, if there is a situation where you know you will need money next year for a large expense, such as a new car or major home repair, it may make sense to pull money out of a retirement account and set aside the taxes that will be due next year. This can be a good option if you are in a lower tax bracket now and expect to be in a higher tax bracket next year. 

Planning Ahead Year Round

This two-part series focused on year-end financial planning with your financial advisor and your CPA or tax advisor. Even if you’re reading this in May, you can use this information to start planning now. If you’re reading this in January and realize your advisor did not do these things then you have time to start finding a new advisor. Review our article on “How To Choose the Right Financial Planner For You” to determine what questions and qualifications to look for. 

Many of the items covered in your year-end review can also be done during your annual review with your financial planner. Your financial situation can change throughout the year and your goals will change, too. Set aside time for this important discussion to stay on track for your short and long-term financial goals. 

Need More Information? 

Call us to learn more, ask questions about your specific circumstances, and determine if we are the right fit for you. Our phone number is 813-556-7171. We can also be reached by email at

Elijah Heath, CERTIFIED FINANCIAL PLANNER™ (CFP®), is a *fiduciary with an ethical obligation to provide information, products, and services in your best interest, not what earns him the best fee or commission. Heath Wealth Management wants to be your advisor for life so you, your children, and your grandchildren all benefit from the relationship.

Click here to read Part 1 of “What Should Your Financial Advisor Discuss in Your Year-End Review?” 

This information is not intended to be a substitute for specific individualized tax advice.

We suggest that you discuss your specific tax issues with a qualified tax advisor.

*Fiduciary services are for advisory relationships only.