10 Most Expensive Tax Mistakes That Cost Real Estate Agents Thousands!

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1 10 Most Expensive Tax Mistakes That Cost Real Estate Agents Thousands! Julie L. Bohn, CPA Are you satisfied with the amount of taxes you pay? Are you confident that you re taking advantage of every available tax break? But most of all, is your tax preparer giving you proactive advice to save on your taxes? The bad news is that you probably do pay too much tax and you re probably not taking advantage of every tax break. And most preparers do a poor job of actually saving their clients money. The good news is that you don t have to feel that way. You just need a better plan. This article reveals some of the biggest tax mistakes that business owners make. Then, it gives brief solutions to actually solve these problems. Please note that this article is designed to be an informational tool only. Before you implement any of these strategies, you should consult a tax professional for more specific guidelines and requirements. #1: FAILING TO PLAN The first mistake is the biggest mistake of all. It is failing to plan. It doesn t matter how good your tax preparer is with your stack of receipts on April 15. If you didn t know that you could write off your kid s braces as a business expense, it s too late to do anything when your taxes are prepared the following year. Tax coaching is about giving you a plan for minimizing your taxes. What should you do? When should you do it? How should you do it? And tax coaching offers two more powerful advantages. First, it s the key to your financial defenses. As a real estate agent, you have two ways to put more cash in your pocket. Financial offense is increasing your income. Financial defense is reducing your expenses. For most agents, taxes are their biggest expense. So it makes sense to focus your financial defense where you spend the most. And second, tax coaching guarantees results. You can spend all sorts of time, effort and money promoting your business. But that can t guarantee results. Or you can set up a medical expense reimbursement plan, deduct your daughter s braces, and guarantee tax savings.

2 2 #2: MISUNDERSTANDING AUDIT ODDS The second big mistake is nearly as important as the first, and that s fearing, rather than respecting the IRS. What does the kind of tax planning we re talking about do to your odds of being audited? The truth is, most experts say it pays to be aggressive. That s because overall audit odds are so low that most legitimate deductions aren t likely to wave red flags. Audit rates are actually as low as they ve ever been for the overall audit rate was just.84% or fewer than one in every 100 returns. Roughly half of those audits targeted the Earned Income Tax Credit for low-income working families. The IRS primarily targets small businesses, especially sole proprietorships, and cash industries like pizza parlors and coin-operated laundromats with opportunities to hide income and skim profits. #3: TOO MUCH SELF-EMPLOYMENT TAX If you re like most business owners, you pay as much in self-employment tax as you do in income tax. If that s the case, you might consider setting up an S corporation or limited liability company to reduce that tax. If you run your business as a sole proprietor, you ll report your net income on Schedule C. You ll pay tax at whatever your personal rate is. But you ll also pay self-employment tax of 15.3% on your first $127,200 of net self-employment income and 2.9% of anything above that in There is also a 0.9% Medicare surtax on all wages or self-employment income in excess of $200,000 for singles, $250,000 for joint returns, and $125,000 for marrieds filing separately. Let s say your profit at the end of the year is $100,000. You ll pay income tax at your regular tax rate, depending on your total taxable income. But you ll also pay about $15,300 in selfemployment tax. This tax replaces the Social Security and Medicare tax that your employer would pay and withhold if you weren t self-employed. An S corporation is a special corporation that s taxed like a partnership. The corporation pays the owners a reasonable wage for the work they do. If there s any profit left over, it passes through to the shareholders, and the shareholders pay the tax on their own returns. So the S corporation splits the owner s income into two parts, wages and pass-through distributions.

3 3 S corporations are so attractive because even though you pay the same 15.3% on your wages as you would on your self-employment income, there is no Social Security or self-employment tax due on the dividend pass-through. Let s say your S corporation earns the same $100,000 as your proprietorship. If you pay yourself $50,000 in wages, you ll pay about $7,650 in Social Security taxes. But you ll totally avoid $7,650 in self-employment tax on the $50,000 pass-through distribution. The S corporation takes a little more paperwork to operate than the proprietorship. And you have to pay yourself a reasonable wage for your service. That means something like you d pay for an outside employee to do the same work. But the IRS is on the lookout for agents who take all their income as pass-through. The reasonable wage for agents varies, depending on the amount of time spent on real estate activities and your location. #4: WRONG RETIREMENT PLAN If you want to save more than the current $5,500 limit (additional $1,000 for taxpayers 50 or older) for IRA s, you have three main choices: Simplified Employee Pensions (SEPs), SIMPLE IRAs, or 401ks. Generally, if you have a business retirement plan, it must be offered to all your employees and the calculations for contributions must be applied in the same manner as for yourself or any family employees. The SEP and SIMPLE IRAs are the easiest plans to set up and administer. There s no annual administration or paperwork required. Contributions are made directly into employee retirement accounts. For SEP plans, self-employed individuals can contribute up to 25% of your net self-employment income, to a maximum of $54,000 for For SIMPLE IRAs, the maximum contribution for 2017 is $12,500 (50 or older can contribute an extra $3,000 catchup.) SIMPLE IRAs may be best for part-time or sideline businesses earning less than $40,000. You can also hire your spouse and children, and they can make SEP or SIMPLE contributions. For even larger retirement contributions not limited to 25% of your self-employment income, consider a 401(k) retirement plan. You can even set up what s called a solo or individual 401(k) just for yourself. The 401(k) is a true qualified plan. And the 401(k) lets you contribute far more money, far more flexibly, than either the SEP or the SIMPLE. For 2017, you and your employees can defer 100% of your income up to $18,000. If you re 50 or older, you can make an extra $6,000 catch-up contribution. You can also choose to match your employees contributions, or make profit-sharing contributions up to 25% of their pay. That s the same percentage you can save in your SEP on top of the $18,000 or $24,000 deferral, for a total maximum contribution of $54,000 per person in (k) s are generally more difficult to

4 4 administer. There are anti-discrimination rules to keep you from stuffing your own account while you stiff your employees. Like SEPs and SIMPLE IRAs, you can still hire your spouse and contribute to their account. If you re older and you want to contribute more than the $54,000 limit for SEPs or 401(k) s, consider a traditional defined benefit pension plan where you can contribute an amount to guarantee up to $215,000 in annual income. Defined benefit plans have required annual contributions. But you can combine a defined benefit plan with a 401(k) or SEP to give yourself a little more flexibility. #5: MISSING FAMILY EMPLOYMENT Hiring your children and grandchildren can be a great way to cut taxes on your income by shifting it to someone who pays less. The IRS has upheld deductions for children as young as 7. Their first $6,350 of earned income in 2017 is taxed at zero to the child. That s because of the standard deduction for a single taxpayer even if you claim them as your dependent. Their next $9,235 is taxed at just 10%. So, you can shift quite a bit of income downstream. You have to pay them a reasonable wage for the service they perform. This is what you would pay a commercial vendor for the same service, with an adjustment made for the child s age and experience. So, if your 12-year-old son cuts grass for your rental properties, pay him what a landscaping service might charge. If your 15-year-old daughter helps keep your books, pay her a bit less than a bookkeeping service might charge. To audit-proof your return, write out a job description and keep a timesheet. Pay by check so you can document the payment. You have to deposit the check into an account in the child s name. But the account can be a ROTH IRA, Section 529 college savings plan, or custodial account that you control until they turn 21. If your business is unincorporated, you don t have to withhold for Social Security until they turn 18. So this really is tax-free money. You ll have to issue them a W-2 at the end of the year. But this is painless compared to the tax you ll waste if you don t take advantage of this strategy.

5 5 #6: MISSING MEDICAL EXPENSES Surveys used to show that taxes were small business owners main concern. But now it is skyrocketing health care costs. If you re self-employed and pay for your own health insurance, you can deduct is as an adjustment to income on Page 1 of Form If you itemize deductions, you can deduct unreimbursed medical and dental expenses on Schedule A, if they total more than 10% of your adjusted gross income. But most of us don t spend that much. But there is a way to write off all your medical bills as business expenses. It s called a Medical Expense Reimbursement Plan (MERP), or Section 105 Plan. This is an employee benefit plan, which means it requires an employee. If you operate your business as a sole proprietorship, partnership, LLC, or S corporation, you re considered self-employed and don t qualify. But if you re married, you can hire your spouse. If you re not married, you can do this with a C corporation. But you don t have to be incorporated. You can do this as a sole proprietor or LLC by hiring your spouse. However, the Affordable Care Act (ACA) effectively made many small business Medical Reimbursement Plans noncompliant with possible big penalties. But, there is an exception for plans with fewer than two participants who are current employees. So, hiring your spouse and using a Medical Reimbursement Plan is still an effective tax reduction strategy, if your spouse is the only participant in the plan. The one exception is the S corporation. If you own more than 2% of the stock, you and your spouse are both considered self-employed for purposes of this rule. You ll need to use another source of income, not taxed as an S corporation, as the basis for this plan. Let s say that you are a self-employed real estate agent and you ve hired your husband. The MERP plan lets you reimburse your employee for all medical and dental expenses he incurs for his entire family including you as his spouse. All of these expenses qualify for reimbursement: major medical insurance, long-term care coverage, Medicare and Medigap insurance, copayments, deductibles, prescriptions, dental care, eye care, chiropractic care, orthodontists, fertility treatments, special schools for learning-disabled children, medical supplies and even bandages and braces. You can reimburse your employee or pay health care providers directly. You will need a written plan document and a method to track your expenses. There s no special reporting required. You ll save income tax and self-employment tax. If you have non-family employees, you have to include them too, but you can exclude employees who are: under age 25, work less than 35 hours per week, work less than nine months per year, or have worked for you less than three years. Non-family employees may make it too expensive to reimburse everyone as generously as you would cover your own family. But, if you re offering health insurance, you can still use a Section 105 plan to cut your

6 6 employee benefit cost. You can do it by switching to a high-deductible health plan, and using a Section 105 plan to replace those lost benefits. For example, a married self-employed agent with two children pays 25% in federal income tax and 15.3% in self-employment tax. A traditional insurance plan was replaced with a highdeductible plan - $5,000 for the family which cut his premium by $7,620. So, even if he hits that $5,000 deductible, he saves $2,620 in premiums. And now, since he deducts his medical costs from his business income, his self-employment tax savings add another $1,166 to his bottom line. He ll save at least $3,071 (possibly more in state and local taxes) in taxes by switching from his traditional healthcare plan to the Section 105 Medical Expense Reimbursement Plan. If you can t use a Medical Expense Reimbursement Plan, consider the new Health Savings Accounts. These arrangements combine a high-deductible health plan with a tax-free savings account to cover unreimbursed costs. To qualify, you ll need a high-deductible health plan with a deductible of at least $1,300 for singles or $2,600 for families and an out-of-pocket limit of $6,550 for singles or $13,100 for families in Neither you nor your spouse can be covered by a non-high deductible health plan or Medicare. The plan can t provide any benefit, other than certain preventive care benefits, until the deductible for that year is satisfied. You re not eligible if you re covered by a separate plan or rider offering prescription drug benefits before the minimum annual deductible is satisfied. Once you ve established your eligibility, you can open a deductible health savings account. You can contribute 100% of your deductible up to $3,4000 for singles or $6,750 for families. If you are over 55, you can contribute an additional $1,000. You can use it for most kinds of health insurance, including COBRA continuation and long-term care plans. You can also use it for the same sort of expenses as a Section 105 plan. The Health Savings Account isn t as valuable as the Section 105 plan. You ve got specific dollar contribution limits, and there s no self-employment tax advantage. But Health Savings Accounts can still cut your overall health-care costs. #7: MISSING A HOME OFFICE If your home office qualifies as your principal place of business, you can deduct a portion of your rent, mortgage interest, property taxes, insurance, home maintenance and repairs and utilities. You will also depreciate your home s basis over 39 years as nonresidential property.

7 7 To qualify as your principal place of business, you must (1) use it exclusively and regularly for administrative or management activities, and (2) have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Regularly generally means hours per week. The space doesn t have to be an entire room. Your business use percentage is calculated by either dividing the number of rooms used by the total rooms in the home if they are roughly equal, or by dividing the square feet used by the total square footage in the home. Special rules apply when you sell your sell your home, but the home office deduction is still a very valuable deduction for most agents. #8: MISSING CAR/TRUCK EXPENSES If you take the standard mileage deduction for your business, you may be seriously shortchanging yourself. Every year AAA publishes a vehicle operating cost survey. Costs vary according to how much you drive but if you re taking the standard deduction for a car that costs more than 53.5 cents/mile, you re losing money every time you turn the key. If you re taking the standard deduction now, you can switch to the actual expense method if you own your car, but not if you lease. You must use the standard deduction for the duration of the lease. You also can t switch from actual expenses to the standard deduction if you ve taken accelerated depreciation on the vehicle. #9: MISSING MEALS & ENTERTAINMENT The basic rule is that you can deduct the cost of meals with a bona fide business purpose. This means clients, prospects, referral sources, and business colleagues. And how often do you eat with someone who s not one of those people? For real estate agents and other professionals that market themselves, this might be never. Generally, you can deduct 50% of your meals and entertainment as long as it isn t lavish or extraordinary. You don t need receipts for business expenses under $75 (except lodging), but you need to record the following information: (1) How much? (2) When? (3) Where? (4) Business Purpose? and (5) Business Relationship. You can also deduct entertainment expenses if they take place directly before or after substantial, bona fide discussion directly related to the active conduct of your business. You

8 8 can deduct the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes and tips. #10: MISSING TAX PLANNING SERVICES Now that you see how real estate agents like you miss out on any so many tax breaks, you should realize what the biggest mistake of all is failing to plan. Have you ever heard the saying if you fail to plan, you plan to fail? It s a cliché because it s true. Fortunately, my tax planning service helps you avoid all these mistakes. I tell you what to do, when to do it, and most importantly, how to do it. To do this, I start with a three-page check-the-box questionnaire that takes about 5 minutes to fill out. There s no need for social security or account numbers. Basic information about your family, home, job, business and investments is all I need. Using this information, not only will I recommend tax-saving strategies, but I will then help you implement them. I ll even review your last two years tax returns to see if I can find deductions you overlooked. I am so confident that I can reduce your taxes with my tax planning service for real estate agents, that if I determine that I can t save you any money, my tax planning services will be free. With that kind of guarantee, the only way you can lose is by not taking advantage of this offer. If you re serious about reducing your taxes, please give my services a try. I can be reached at (512) , or you can visit my website at