Five Facts about the Opportunity Zone Tax Incentive
Providing tax benefits to investors who invest eligible capital into distressed communities throughout the U.S. and its possessions, Qualified Opportunity Zones (QOZs) were created under the Tax Cuts and Jobs Act of 2017 to spur economic development and job creation. If you're considering investing in a QOZ, here are five facts you should know:
1. Defer Tax on
Capital Gains. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund (QOF) and meeting other requirements.
2. Partnerships. In the case of an eligible capital gain realized by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and its shareholders, as well as estates and trusts and its beneficiaries.
3. Qualifying for the Deferral. To qualify for the deferral, investors must meet the following criteria:
• Capital gains must be invested in a QOF within 180 days.
• Taxpayer elects deferral on Form 8949 and files with its tax return.
• Investment in the QOF must be an equity interest, not a debt interest.
4. Investment held 5 to 7 years. If a taxpayer holds its QOF investment at least five years, the taxpayer may exclude 10 percent of the original deferred gain. If a taxpayer holds its QOF investment for at least seven years, the taxpayer may exclude an additional five percent of the original deferred gain for a total exclusion of 15 percent of the original deferred gain. The original deferred gain – less the amount excluded due to the five and seven year holding periods – is recognized on the earlier of sale or exchange of the investment, or December 31, 2026.
5. Investment held 10 years. If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer may elect to increase its basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged. This may eliminate all or a substantial amount of gain due to appreciation on the QOF investment.
To view the current list of designated Qualified Opportunity Zones navigate to the Opportunity Zones Resources page at the Department of Treasury's www.cdfifund.gov.
Questions about the Opportunity Zone Tax Incentive? Don't hesitate to call.
Penalty Relief for Withholding,
Estimated Tax Shortfalls
The estimated tax penalty has been waived for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year; however, there is a catch: the penalty is only waived for taxpayers who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. Typically, a taxpayer must pay 90 percent to avoid a penalty.
The waiver computation will be reflected in a revised Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and instructions.
This penalty relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017. Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.
The updated federal tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks.
However, the updated withholding tables were not able to fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments; i.e., a "Paycheck Checkup" to avoid a situation where they had too much or too little tax withheld when they file their tax returns.
Please call the office if you need assistance updating your withholding this year to make sure you are having the correct amount of tax withheld for 2019.
With over 30 years’ financial expertise, Todd Hickman co-hosts a weekly financial radio show on NewsTalk 560AM KLVI in Beaumont, Texas and Talk 1370 AM KJCE in Austin, Texas. You can reach Todd during the week at 409-840-6900 or by visiting his company’s website at http://savemyretirement.com. Asset Growth Associates is celebrating its 20th year in business.
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