Obamacare Penalty

The Obamacare penalty will still be applicable for 2018 tax returns. If you don't have qualified health insurance (the individual mandate) in 2018, you will be subject to substantial penalties. In 2019, the penalty goes to 0 so you will not be forced to have health insurance coverage.

The New Child Tax Credit

Under the new tax act effective 1/1/2018, families with children really do well. The credit has increased to $2,000 per child 16 and under from $1,000. Even if tax is 0, $1,400 of each $2,000 is refundable. Older children and other dependents also qualify for a new $500 credit.

Opportunity Zones

Governors of 18 states have set up qualified opportunity zones on April 19, 2018 where new investment can be eligible for preferential tax treatment. An opportunity zone is an economically distressed area. The Federal government is trying to direct development dollars to these areas and create jobs. It is estimated that these areas will attract 6 trillion dollars from investors. Why would investors want to do this? They get to defer any capital gains even short term gains if they reinvest their capital gains in an opportunity zone within 180 days. The process is somewhat similar to like kind exchanges except that you don't have to reinvest basis and you don't need an escrow agent. It is a temporary deferral. You have to recognize the capital gains on the earlier of the disposal of the opportunity zone investment or 12/31/2026. If you hold the investment for 5 years,  you get to exclude 10% of the deferred capital gains from tax. Holding for 7 years gives you a 15% exclusion. The investment in the opportunity zone also grows tax free like a Roth if you hold it for 10 years. The list of approved opportunity zones can be found at Opportunity Zones Resources and will be continually updated.

Donations of clothing and household items to charity

What should you do if you donate over $5,000 worth of clothing and household items to Goodwill? First of all you should list all of the individual items donated and get a receipt from the charity. You should also take pictures of the donations. Obtaining the value of the donated items is the tricky part. Usually such items are worth at most only 20% of the retail cost. Many charities have online guidelines for what clothing and household items are worth in good condition. To avoid complications with an IRS audit you should consider getting an appraisal before you donate the items.

Charitable Donations and 501(c)(3)

The Internal Revenue Code section 501(c) covers tax exempt non-profit organizations. There are 29 different types but only one of them allows you to deduct contributions on your tax return which is 501(c)(3). This subsection covers organizations operated exclusively for "religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition ( no part towards athletic facilities or equipment), or for the prevention of cruelty to children or animals.  No part of the net earnings can be for the benefit of any private shareholder or individual." The IRS has to approve an organization requesting 501(c)(3) status. The IRS issues a publication every year listing all of the 501(c)(3) organizations which can be searched online by federal ID #. Most foreign organizations do not qualify. However certain Canadian, Mexican, and Israeli charities qualify by tax treaty.

Publicly Traded Partnerships(PTPs)

These are partnerships that are  traded on a securities market. Passive losses from a PTP can only be used against passive income from the same PTP so they don't fall under the sames rules for deducting passive losses on form 8582. However when you sell your  partnership interest you can then deduct suspended passive losses if you have basis. Investing in PTPs usually results in a very complicated K-1 that may increase your tax preparation fees.

Business vs. Hobby

The IRS requires that a business has a profit motive in order for you to deduct reasonable, ordinary , and necessary business expenses from it. How do you prove a profit motive? If you show a profit in 3 out of 5 years on a schedule C business, that will work. If you don't, the IRS will wonder why you are working without making any money. The IRS might think you are trying to write off personal expenses against your other W-2 income. There are also 9 factors which the IRS looks at to determine a profit motive such as the time and effort in the activity, the manner the activity is carried on, and whether there are elements of personal pleasure or recreation. It is a facts and circumstances test. If the IRS determines that your activity is not a business but a hobby, then you have to report the income on line 21 of form 1040 and the expenses are not deductible.