Beginning in 2018, you won’t be claiming a deduction for personal exemptions on your federal income tax return. Yet personal exemptions still exist. They can make a difference on both state and federal income tax returns. Oddly enough, even though the amount you can deduct has been reduced to zero, for some taxpayers it’s still important to know the dollar amount of the personal exemption deduction under prior law.
An extraordinary provision added by the Tax Cuts and Jobs Act makes it possible for taxpayers to defer almost any kind of capital gain and potentially secure additional tax benefits if they invest in a qualified opportunity fund. (Proposed regulations make exceptions for gain from section 1256 contracts or offsetting positions.) You need to make this election during the 180-day period beginning on the day you have the gain, and then show on your tax return that you elect to invoke this provision. Your gain, up to the amount you invest, will not be taxable that year, but instead will become taxable when you sell this investment, or on December 31, 2026, if the investment remains unsold on that date.
Depending on how long you hold this investment, some of that gain may disappear. After five years your basis is increased by 10% of the amount that was deferred, eliminating 10% of the gain from the original sale. Another 5% of that gain disappears if your holding period stretches to seven years. As a final kicker, reaching the ten-year milestone lets you avoid paying tax on any gain from an increase in the value of this investment during your holding period.
A qualified opportunity fund has to be at least 90% invested in properties and businesses in certain low-income areas or adjoining areas. That’s the underlying idea: to revitalize these areas by attracting investment dollars. Those dollars are not targeted to particular types of projects, however. Funds will pursue properties and businesses that provide the highest returns for their investors.
As written in the law, this tax benefit is available to all taxpayers. Anyone who has a capital gain of almost any kind can defer reporting the gain by investing in one of these funds. Yet as of this writing, these investments are available only to accredited investors—those who make over $200,000 per year (or $300,000 with their spouse), or have net worth, excluding their home, above $1,000,000. Members of the general public can’t buy in because the funds haven’t gone through the lengthy, expensive process of getting their offerings registered with the SEC. At least one firm has made an SEC filing that could lead it to become publicly traded as a qualified opportunity fund REIT, so this deferral benefit could eventually become available to all investors. For now, however, this extraordinary new tax benefit is reserved for the wealthy.
Missing the 60-day deadline to complete a rollover after receiving a distribution from a retirement plan or IRA can have painful consequences. There’s a simple solution, though, if you meet the requirements.
If you prepare your own tax returns, be sure to find out whether you can use one of the free offerings from leading software providers. Because of changes in the tax law, millions more taxpayers will qualify for these free offerings than in the past. Here’s our practical guidance on the best alternatives:
As a general rule, we’re required to pay our federal income tax over the course of the year through withholding, estimated tax payments, or a combination of the two. Unless an exception applies, you pay a penalty if these payments total less than 90% of your tax liability. The tax law that took effect in 2018 changed so many rules that we can expect a larger than usual number of taxpayers to fall short of 90% that year. The IRS says it will waive the penalty if you paid at least 85%. The waiver isn’t automatic, though: you have to file Form 2210.
Reversing course, the Trump Administration announced today that the government shutdown will not prevent the IRS from sending income tax refunds to taxpayers. The first posting of this item mentioned that a question had been raised as to whether it is legal to do so. In a subsequent information release, the IRS says Congress directed the payment of all tax refunds through a permanent, indefinite appropriation, and that the Office of Management and Budget, which had previously directed the IRS not to pay refunds during a budget impasse has reviewed the law and concluded that it may so so.
The release also sets January 28 as the date it will begin processing returns.
Have you heard that the Tax Cuts and Jobs Act repealed the alternative minimum tax (AMT)? Probably not, because the AMT survived. Yet it’s been whittled down to a shadow of its former self. For nearly all taxpayers, AMT repeal is a practical reality.
Update: as explained here, the IRS now says it will be able to pay refunds during the shutdown.
The 2019 tax season was already bound to be challenging. We can expect plenty of confusion in the first filing season under a law that made sweeping changes affecting taxpayers in all categories. Add to that a complete redesign of Form 1040, taking a modular, block-building approach and eliminating the 1040-EZ and 1040-A versions. The IRS is still scrambling to get its form instructions and information publications in final form, and has yet to announce a date for the start of the filing season.
Now the IRS faces these challenges under the handicap of a partial government shutdown. Essential functions at the agency continue, including — when they’re ready — accepting tax returns and payments. According to the Wall Street Journal, however, the IRS generally doesn’t pay refunds during a shutdown.
Any substantial delay in paying refunds would produce hardship for millions of Americans who depend on receiving a substantial check as early as possible in the year. Tax refunds, which total hundreds of billions of dollars, also boost retail sales and the general economy. A shutdown that delays those refunds would have consequences for all of us.