REALTORS® enjoy a broad range of deductions and other advantages under the federal tax code because the government enables brokers to treat agents as independent contractors, not employees. But you need to take a strategic, organized approach to your financial situation to make sure you don’t leave money on the table or get socked with a big bill at tax time.
These tips from tax professionals can help you plan wisely during the remainder of 2014:
Gather your records. As an independent contractor, you’re running your own small business. The IRS expects you to keep accurate records of business expenses and log your activities. “The IRS will be very generous to agents if they have receipts,” and accountants also appreciate clients who are well prepared when they come in for advice, says Don Williamson, professor of taxation at American University in Washington, D.C., and an accountant with Lamonaca & Williamson in Falls Church, Va. “The key is to account for each expense so I can go through the checkbook or the credit card statement and identify those things.” There’s another reason to keep good records: Your accountant may be able to find ways you might have missed to cut your tax bill. For example, although the IRS allows you to use a simplified method to claim a home office deduction instead of detailing those expenses on your tax return, taking the simpler approach could result in a smaller deduction, says certified public accountant Peter G. Baker, owner of Business Planning Group in Washington, D.C.
Meet with a tax expert. You may see an accountant every spring to help you file your taxes, but what about the rest of the year? Your tax situation is evolving every day, so it’s smart to have an ongoing relationship with a financial adviser who can help you plan ahead, says Jennifer K. Greco, a CPA with Cooper Williams LLC in Salt Lake City. “The best thing is to go in to see your tax professional, bring your financial statements, and say, ‘This is where I am right now. How much am I looking at taxwise, and what can I do to minimize that tax?’ ” Greco says.
Take stock of your earnings. As the year winds down, analyze your commissions and other taxable income since January and project what you expect to earn through Dec. 31. “Once we know how successful you’re going to be, we can manage your tax bill” by coming up with a strategy to minimize your taxable income, says Baker.Also, be sure to consider the tax implications of significant transactions before you move ahead with them. For example, you can avoid capital gains taxes when selling real estate by investing the money in another piece of property instead of taking it in cash—but you need to make the proper arrangements in advance, says Greco.
Invest in your business. As an independent contractor, you are able to deduct—subject to limits—the cost of computers, mobile phones, office furniture, and other equipment you acquire for the day-to-day operation of your business in the year you acquire the items. So buying a new laptop or smartphone, or even a vehicle, could be an easy way to lower your tax bill. Ask yourself, however, whether you really need the items, advises Greco. “People will say, ‘I’m going to buy a new computer because I need the write-off.’ But if you don’t need a new computer, don’t spend the money.” Besides big-ticket purchases, remember that even small everyday expenses add up—and can translate into deductions. “Good real estate agents realize that almost everything they’re doing has some potential business purpose to it,” Baker says. He recommends paying electronically for everything you buy—even small items like coffee—as an easy way to ensure that bona fide expenses don’t slip through the cracks.
Expect uncertainty. Some elements of your return may remain unsettled as the end of the year draws near—and even beyond Jan. 1—because tax laws are constantly in flux. For example, the cost of mortgage insurance premiums is traditionally a deductible expense, but it won’t be for 2014 unless Congress approves the necessary legislation. The limit on deductible equipment purchases is also up in the air.
Lawmakers know taxpayers expect them to act, says Evan Liddiard, senior policy representative–federal taxation for the National Association of REALTORS®. “Congress is very aware of the need to pass certain expired tax provisions that will apply to 2014, and will likely do so late this year or early next year,” he says.
Still, the best course of action is to plan for the worst and be sure you’ve put aside enough money to cover your tax bill in the event expected deductions aren’t available, Baker says. Ideally, you should have been taking this into account when sending quarterly estimated tax payments to the IRS. But if not, you’ll remember why you saved for a rainy day.
Author:Bill Hurd Phone: 972-978-2395 Dated: January 27th 2015 Views: 842 About Bill: ...