Top 3 Year-End Planning Tips for Lawyers

December 29, 2020

As I’ve spoken with many lawyers throughout 2020, I’ve been impressed by how resilient most law firms have been.  Most lawyers have seen their firms hold steady, and some have even seen growth in 2020.  I consider that an amazing testament to the long-established truth that nothing of any importance gets done without the input and involvement of lawyers.  While most of us will happily bid farewell to 2020 and look forward to 2021, there are a few year-end planning items that lawyers should be mindful of and ready for:

1. Prep for upcoming quarterly estimated tax payments

As year-end approaches quickly, so does January 15, and soon thereafter, April 15.  If you haven’t done so already, now would be a good time to connect with your CPA to make sure you are well-prepared for your upcoming quarterly estimated tax payments.  None of us want the unpleasant surprise of finding out we didn’t pay enough throughout the year, and suddenly we have to pony up a lot more cash on April 15 to meet our tax obligation.  Most law firm partners I’ve spoken to have been pleasantly surprised at how their firms have performed this year, which could mean better compensation than expected.  Have the conversation with your CPA now to make sure you are setting aside enough cash so that you avoid having to write an unexpectedly large tax check in April.

2. Review your 401(k) stock/bond mix

Year-end is a great time to review your 401(k) account and make sure that you are still comfortable with your stock-bond ratio.  Because most people automatically contribute to their 401(k) with paycheck withholding, it’s quite common to not review your account in detail very often.  Most people sort of “set it and forget it.”  You should take a look at your September 30th statement and make sure it is correctly allocated between stocks and bonds.  Ask your advisor to help you determine the right mix.  One concept to consider is “asset placement.”  This concept calls for placing tax-inefficient assets such as bonds and other income-producing investments in tax-deferred accounts (i.e. 401k) and tax-friendly investments such as stocks and equity ETFs inside taxable brokerage accounts.  This concept of asset placement enables your overall portfolio to be better positioned for after-tax performance.  If you have a 401(k) and a taxable brokerage account, you may be able to achieve better after-tax returns by improving your asset placement.

3. Gifting appreciated investments

Most people focus on their charitable giving around year-end.  To the extent you are charitably inclined, make sure you are being as smart as possible with the way that you gift.  One of the most tax-smart ways to give to charity is to gift highly appreciated investments.  As the donor, you will receive the tax deduction based on the fair market value of the investment at the time of the gift.  An added benefit is that you are taking an asset that has significant growth, and instead of selling that investment to make a gift of cash, which would trigger capital gains tax, you are gifting the asset and thereby avoiding capital gains tax.  No doubt 2020 has been a tough year for many charitable organizations, so if you have the inclination and capacity to give, consider using appreciated investments as a great vehicle for those gifts.

We are rapidly approaching the end of what has been a most challenging year.  Hopefully, these few year-end tips will help you end the year well and start 2021 on the right foot!

Justin Peacock, MBA, CFP® is a Wealth Manager at BDF.  He works closely with clients to design wealth management plans that take into account the full spectrum of their career and personal concerns.  Justin graduated from Illinois State University with a B.S. in Mass Communication and earned his MBA from Northwestern University’s J.L. Kellogg School of Business.