If you look at your 2018 income and taxes, you may notice that a few things have changed thanks to the 2017 Tax Cuts and Jobs Act (TCJA), which has eliminated or limited many tax breaks.
While there are some small reductions to income tax rates for most individual tax brackets, they may not be enough to offset the removal of the many tax breaks – especially if part of your income is generated from investments and you’re paying capital gains taxes.
The TCJA will continue to impact your taxes in 2019 and beyond. As an investor, what can you do to plan accordingly and choose the right investment vehicles so you can minimize your tax bill?
How the Tax Cuts and Jobs Act Affects Your Taxes
Changes in Personal Exemptions and the Standard Deduction
The TCJA suspends personal exemptions, which can impact taxpayers who used to itemize their deductions. Meanwhile, certain itemized deductions are suspended. These include work-related moving expenses, some professional fees, investment expenses, and unreimbursed employee business expenses.
In addition, the TCJA has increased the standard deduction for individuals. These changes can affect whether you choose to itemize your deductions or take the standard deduction.
In some cases, itemizing deductions can save taxes, but the filing is more complicated. With the increase in standard deductions and the elimination of many itemized deductions, you should reevaluate whether you’d benefit more from itemizing or taking the standard deduction.
Updates to the Alternative Minimum Tax (AMT)
The changes in AMT, which disallow some deductions and treat certain income items differently (e.g., incentive stock option exercises), will affect a small portion of taxpayers.
If your AMT liability exceeds your regular tax liability, you must pay the AMT. If you could be negatively impacted by this update, you should plan for the AMT to minimize your tax exposure.
Changes That Affect Tax Planning for Investments
If you’re buying, holding, or selling any kind of investment, you should revisit your tax planning strategy. Even though the long-term capital gains tax rate remains unchanged under the TCJA, the changes to income tax thresholds and tax brackets could impact the taxes you pay on your investments.
Here are a few key changes that could affect your tax exposure:
When your investments produce income in the form of dividends or interest, you should consider these tax implications:
- Qualified dividends are taxed at the more favorable long-term capital gains tax rate rather than the ordinary income tax rate.
- Interest income is generally taxed at ordinary income rates. As such, stocks that pay qualified dividends may result in lower tax payment than income investments such as CDs and taxable bonds.
- The tax treatment for bonds that produce interest income varies. For example, certain local government bonds are excludable on federal returns, tax-exempt interest from some private-activity municipal bonds could impact AMT, and corporate bond interest is fully taxable.
- If your modified adjusted gross income exceeds $200,000 per year ($250,000 if married filing jointly and $125,000 if married filing separately,) you may also need to pay the net investment income tax, which can include capital gains, dividends, interest, and other investment-related income.
Under the TCJA, timing can have a significant impact on the amount of taxes you pay on capital gains.
For instance, with the right strategy, you can bring your long-term capital gains rate down to as much as 20 percentage points lower than your ordinary income tax rate.
The long-term gains rate applies to investments held for over 12 months and remains at 15% for middle-bracket taxpayers. Holding onto your investments until you have owned them more than a year can help substantially reduce tax payment on any gain.
Here are a few helpful strategies:
- Use unrealized losses to absorb capital gains.
- Avoid triggering the wash sales rule when selling securities.
- Swap your bonds to achieve tax loss with virtually no change in economic position.
- Avoid mutual funds with high turnover rates that can create income that’s taxable at ordinary income rates.
A Simpler Way to Avoid Capital Gains Tax
Although there are many strategies to lower your capital gains exposure, they’re often complex and require active management of your portfolio. Not to mention, a slight miscalculation or oversight could undo all the planning and hard work.
Thankfully, the TCJA also introduced an investment vehicle that can help simplify your investment while significantly lowering your capital gains tax exposure.
Reduce Tax Payment by Investing in Opportunity Zones
Opportunity Zones were created under the TCJA to;
- Allow U.S. investors to defer all 2018 capital gains for eight years if the profits are reinvested and held in an Opportunity Zone
- Lower the amount of capital gains taxes resulting from the sale of a capital asset by 10% or 15% if the proceeds therefrom are held for five or seven years, respectively, in an Opportunity Zone project.
- Provide for a full exemption from capital gains taxes on all future capital gains on the invested funds if an investment is held for ten years following investment.
A few restrictions apply, such as the requirement that invested funds in an Opp Zone be from capital gains generated no more than six months prior to investment. But, the legislation is flexible – invested funds can be from the sale of any capital asset such as real estate or stocks and bonds.
While you can invest in many different assets to take advantage of the Opportunity Zones designation, real estate investments are one of the best choices as they can be high-yield and low-risk.
To simplify the process and ensure that you’re investing in high-quality real estate assets, you can take a look at our packaged investment opportunities that allow you to choose from a variety of investment structures that suit your investor profile and available funds.
The Plaza Colón Hotel & Suites in Puerto Rico is one of these investment vehicles – as a high-yield investment fund with a projected return rate of 19.2%, this is an opportunity not to be missed.
Learn more about this real estate opportunity and start taking advantage of the tax benefits offered by Opportunity Zones.
*Lifeafar and and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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