As a real estate agent, you’ve probably fallen into the habit of kicking off your tax planning efforts in March, with a mad rush to get everything sorted by the April 15th deadline – if you’re on top of your game, that is. For others, it’s a relentless cycle of extensions, pushing the tax deadline until October 15th.
While extensions can be a lifesaver, there’s a critical flaw with this last-minute approach: many of the tax-saving opportunities available to real estate agents need to be completed within the calendar year, not just by the filing deadline. Waiting until April could mean missing out on significant savings.
So, why not change the game this year? Start thinking about your tax planning in the fall, and you’ll have a head start to optimize your tax bill and keep more of your hard-earned GCI. In this article, we’ll explain why fall is the perfect season to start your tax planning and highlight five crucial tax planning opportunities to consider during the autumn.
1. Choose the Right Retirement Plan
Selecting the right retirement savings plan can make a world of difference in your tax situation. That said, there are two main options for real estate agents to choose from.
SEP IRA
Think of the SEP IRA as your flexible friend. This retirement plan offers versatility in contribution timing, allowing contributions up to the tax deadline. This is fantastic news for those who tend to procrastinate but still want a solid deduction.
However, the SEP IRA requires careful cash flow planning to fund contributions effectively. You’ll need to have the cash available to fund your contribution to unlock those significant deductions. So, the key takeaway here is to start setting aside funds for your contribution now. When April rolls around, you’ll be in a prime position to reap the full benefits.
Solo 401k
When you’ve experienced substantial success in your business and, in turn, are eyeing a more substantial deduction, the Solo 401k plan might be the right plan for you. It’s a popular choice for high-income agents looking to maximize their tax impact.
However, some contributions must be made during the calendar year. This means you can’t max out a Solo 401k in April for the previous year, so don’t procrastinate if you’ve had a lucrative year and are eager to enhance your retirement nest egg.
The key in choosing the right retirement plan is finding the balance between flexibility and reward. The SEP IRA offers flexibility with a later contribution deadline, while the Solo 401k packs a bigger punch but requires timely action.
2. Timing of Big Business Purchases
Strategically timing significant business expenses can help manage your tax brackets effectively. For instance, if you anticipate your joint income will reach $375,000 in the fall, consider a planned $10,000 business expense from January 2024 into December to avoid entering into the 32% tax bracket. Conversely, if your income will land within the 24% bracket at around $360,000, delaying the purchase until January 2024 could be a smart move. Again, it’s all about optimizing your tax brackets.
3. Review and Adjust Estimated Tax Payments
For small business owners like real estate agents, taxes can be unpredictable. Market cycles and seasonality in real estate add even more complexity. To avoid underpayment penalties, aim to meet one of these two requirements:
- Paying at least 90% of your current year’s tax liability.
- Paying 100% of your previous year’s tax liability (110% if your adjusted gross income exceeds $150,000 for married couples filing jointly or $75,000 for individuals).
Remember that meeting these safe harbor criteria doesn’t eliminate your tax liability, but prevents underpayment penalties.
And there’s a flip side to this coin.
In a down year, where cash flow is tight, the estimated payments you were scheduled to make based on an all-time high GCI the previous year get difficult to stomach. Beyond that, they might not even be necessary.
Running a tax projection in the fall can help ensure you’re saving just the right amount for your total tax bill, preventing any surprises come April or making your financial life unnecessarily tight only to receive a giant tax refund in April.
4. Review Business Structure
Fall is an ideal time to evaluate your business’s financial performance for the current year and project income for the next. Consider transitioning to an S Corporation, which can offer more tax efficiency. This structure allows you to pay yourself a reasonable salary and receive the rest of your income as dividends, potentially reducing self-employment taxes.
Be aware of the added complexity associated with an S Corp and ensure the tax benefits outweigh the costs and complications. January 1st can be a convenient time to make the switch from a bookkeeping perspective, but in order to get that done, you need to start planning to make the switch ahead of time.
5. Charitable Contributions and Marketing Partnerships
Charitable contributions can be complex for S Corporations and individuals due to various tax regulations.
As an S Corporation, you are not permitted to make direct charitable contributions. Instead, any charitable giving typically flows through to individual shareholders, who must claim the deductions on their personal tax returns. This indirect route can be complex to navigate.
Additionally, individuals often find it difficult to claim charitable deductions, due to the high standard deduction implemented by the Tax Cuts and Jobs Act (TCJA) of 2017. This raised the bar for itemizing deductions, making it less advantageous for many taxpayers to claim deductions for charitable contributions.
However, there’s still a way to support your favorite charitable organizations while benefiting your business.
Instead of making direct charitable contributions, explore marketing partnership opportunities with your favorite charitable organizations. Partnering with a charity for marketing purposes can allow you to deduct associated expenses as legitimate business expenses. This approach allows you to contribute to a cause you’re passionate about while also reaping the benefits of a tax deduction for your business. It’s a win-win situation that not only supports your community but also aligns with your business goals.
As always, be sure to consult your tax advisor to plan efficiently.
In an ideal world, your financial team, consisting of a financial planner and a CPA, should engage you proactively during these key times, rather than waiting for you to reach out with questions. By taking proactive steps in the fall, you’ll be better prepared to make informed financial decisions that benefit both your business and your bottom line when tax season rolls around. Fall is your opportunity to optimize your tax planning and secure valuable savings.
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