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Year-End Tax Planning Guide (Part 2)

It’s just about that time where the big guy in the red suit breaks into your house and deposits all of the presents that you didn’t have to stress out about thinking about, locating and buying. If Santa was real, I think we’d all appreciate him a lot more as an adult than as a kid. I digress but maybe Santa can deliver you a gift or two in the form of a tax deduction before year-end. And by Santa, I mean the person who is pulling his strings…YOU.

Here’s a big one if you have large capital gains – consider an investment in an Opportunity Zone. If you invest the sales proceeds in to a qualified opportunity zone fund within 180 days of the sale, you will be able to defer your capital gain for years. What’s even better is that if you hold the investment in the Opportunity Zone for over 10 years, you will pay zero federal income tax from capital gains on the sale of that investment. Granted, you will eventually have to pay taxes on most of the originally deferred gain that you got from investing in the Opportunity Zone, but that won’t be due until the end of 2026. If you act before the end of 2019, you’ll only pay tax on 85% of the capital gain in 2026. If you don’t act until 2020 or later, then you’ll pay tax on 90% of the capital gain.

Speaking of deferring income taxes, there are other ways to do that if you don’t have the need or desire to invest in an Opportunity Zone. If you can defer a bonus or any business income until 2020, then you bought yourself another 12 months to come up with the associated tax money. Or, maybe you’re in a low income tax bracket this year but you know that you’re going to be making a lot more money in 2020. In that case, you might want to do the opposite because paying the tax at a lower rate could be more valuable than deferring the tax for a year.

Inspired by the season to give? You can give $15K per year to just about anyone without reducing your estate tax exemption. If you’re married, that doubles to $30K per person. If the recipient is married, then it doubles once again to $60K. This renews yearly, so if you want to take advantage of your 2019 annual gift tax exclusion, then you need to gift the money or property by the end of the year.

If the giving you’re inspired to do is more of a philanthropic nature, then you might want to consider a Donor Advised Fund (DAF). With a DAF, you can transfer money to the account in the year that you want the deduction and then disperse to charities of your choice at your discretion. This allows you to batch the deduction into the year that you transfer funds to the DAF to work around the increased standard deduction without having to figure out exactly how and where you want to give at the last moment.

Let us know if you’d like to discuss any of the above strategies and/or run tax projection modeling on these or any other tax reducing strategies discussed in other blog posts.

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