RealEstateProTaxes.com, an affiliation of CPAs specializing in tax planning for real estate professionals, provides some tips on how to cut down on your 2005 taxes.
"As a real estate agent or broker, make sure to pay all of your outstanding bills before the end of the year since you can generally deduct your professional expenses directly against your commission income," explains Andrew Schwartz, CPA, founder of RealEstateProTaxes.com. "Items paid with credit cards are deductible in the year charged," adds Schwartz.
Allowable expenses include anything that is "ordinary" and "necessary" in connection with being a realtor, including advertising costs, cell phones and internet access, gifts to clients, and professional dues and licenses. A complete listing of professional expenses common to realtors is
available here.
Why are most realtors taxed as independent contractors? According to the IRS in Publication 15-A, Employer's Supplemental Tax Guide: licensed real estate agents are treated as self-employed if "substantially all payments for their services as real estate agents are directly related to sales rather than to the number of hours worked, and services are performed under a written contract providing that they will not be treated as employees for federal tax purposes."
Auto SavingsDeducting your automobile expenses is another way to save taxes. Each year, you base your deduction on either the standard mileage rate or the actual expenses incurred during the year, including insurance, gas, repairs, and lease payments or depreciation based on the car's original cost. The standard mileage rate is 48.5 cents per mile driven after September 1st, up from 40.5 cents per mile for the first 8 months of the year. Don't forget to claim the business use percentage of the interest you pay on your car loan as well.
Now is the time to update your mileage log for the year. If you ever get audited, the IRS will want you to provide a log substantiating the automobile deduction you claimed.
Child LaborDo you have a child under the age of 18? If so, you'll save some taxes by employing your child. There's a special loophole that exempts children of self-employed individuals from paying social security, Medicare, and federal unemployment taxes on wages paid by a parent.
For 2005, as long as your child is under the age of 18, you can pay him or her up to $5,000, and your child won't owe any income taxes on that money (assuming they have no other income). Even so, you get to deduct the wages paid as a business expense.
You have until December 31st to set yourself up with the IRS as an employer, and to compensate your child a "fair wage" for services provided during the year. Your child can even fund an IRA or Roth IRA with up to $4,000 this year based on the wages paid by you.
Save Taxes By Saving For RetirementSetting up a self-employed retirement plan is another way to save you taxes. Take a look at the Solo 401(k), which generally allows for larger contributions than a SEP IRA, provided you have no employees who work more than 1,000 hours per year except for your spouse.
With these tax advantaged retirement accounts, you can contribute $14,000 ($18,000 if you are 50 or older) plus 20% of your net self-employment income, up to $42,000 for 2005. If you're 50 or older, this year's max increases to $46,000. Amounts contributed reduce your taxable income and grow tax-deferred. The deadline for setting up a Solo 401(k) is December 31st.
Otherwise, you have until the due date of your tax return, including extensions, to establish and fund a SEP IRA. You can generally put away up to 20% of your net self-employment income into these tax-advantaged retirement savings accounts.
Special Tax Break for Realtors If you own rental real estate, you have until the end of the year to take the necessary steps to be able to max out the rental losses you can claim. As a realtor, the "passive loss" rules that limit deductible rental losses to just $25,000 per year don’t apply to you. To qualify for this exception, however, you need to spend more than half your time, and at least 750 hours, during the year working in the real estate trade. Plan your schedule accordingly through the rest of the year to ensure that you meet these two requirements.
A Few Additional SuggestionsPrior to December 31st:
- Send in your January, 2006 mortgage payment early enough so it will be processed prior to 12/31/05. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.
- Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize. Don't forget to get a receipt.
- Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.
- Pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.
- Evaluate whether you'll save any taxes by postponing 2005 income or deductions into 2006 or by accelerating 2006 income or deductions into 2005.
Andrew D. Schwartz, CPA is the editor and a major contributor to
RealEstateProTaxes.com, a website that provides income tax and financial planning information geared towards real estate professionals. Schwartz has provided financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal.
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