Are you satisfied with the amount of taxes you pay? Are you confident that you will benefit from every available tax break? Most importantly, does your tax preparer proactively advise you? save on your taxes?
The bad news is that you probably have make pay too much tax and you are probably do not take advantage of every tax break. And most preparers do a mediocre job of saving money to their clients.
The good news is that you do not have to feel this. You just need a better plan. This article reveals some of the biggest tax mistakes made by business owners. Then he gives brief solutions for actually solve these problems. Please note that this article is designed to be an information tool only. Before implementing any of these strategies, you should consult a tax professional for specific guidelines and requirements.
1: FAILURE TO PLAN
The first mistake is the most serious of all. He fails to plan. No matter how good your tax preparers are with your receipt stack on April 15th. If you did not know that you could deduct your kids&39; pins from professional fees, it is too late to do anything when your taxes are prepared the following year.
Tax coaching is about giving you a plan to minimize your taxes. What should you do? When should you do it? How should you do it?
And tax coaching offers two more powerful benefits. First of all, this is the key to your financial defenses. As a real estate agent, you have two ways to put more money in your pockets. The financial offense increases your income. Financial defense reduces your expenses. For most agents, taxes are their main expense. So it makes sense to focus your financial defense where you spend the most.
And secondly, tax coaching guarantees results. You can spend all kinds of time, effort and money promoting your business. But that can not guarantee results. You can also set up a medical expense reimbursement plan, deduct your daughter&39;s corsets and guarantee tax savings.
2: THE AUDIT PROBLEMS OF THE AUDIT
The second big mistake is almost as important as the first, and it is rather feared than to respect the IRS.
What kind of tax planning we are talking about affects your chances of being verified? The truth is that most experts say it pays to be aggressive. Indeed, the overall verification probabilities are so low that most legitimate inferences are not likely to trigger "alarm signals".
Verification rates are actually as low as they were in 2008 – the overall verification rate was only one in 99 returns. About half of these audits were for the working income tax credit for low-income working families. The IRS targets primarily small businesses, especially individual businesses, as well as cash industries, such as pizzerias and coin launderers, offering the ability to hide incomes and save money. profits.
3: TOO MUCH FOR SELF EMPLOYMENT
If you are like most business owners, you pay as much for tax on self-employment as for income tax. If this is the case, you might consider creating an "S" corporation or a limited liability company to reduce this tax.
If you operate your business as a sole proprietor, you will report your net income on Schedule C. You will have to pay tax at your personal rate. But you will also pay a 15.3% tax on your first net income of $ 106,800 and 2.9% of anything greater than 2010.
Say your profit at the end of the year is $ 60,000. You will pay income tax at your usual tax rate, based on your total taxable income. But you will also have to pay about $ 9,200 in self-employment taxes. This tax replaces the social security and health insurance tax that your employer would pay and withhold if you were not independent.
An "S" corporation is a special corporation that is taxed as a partnership. The company pays homeowners a reasonable salary for the work they do. If there are any profits, these are passed on to the shareholders, who pay the tax on their own statement. Company "S" splits the owner&39;s income into two parts: wages and transitional distributions.
"S" companies are so attractive because even if you pay the same 15.3% of your salary as you would on your self-employment income, there are no Social security or tax on self-employment due on the transmission of the dividend. Suppose your company S earns the same $ 60,000 as your sole proprietorship. If you pay yourself $ 30,000 in salary, you will have to pay about $ 4,600 in social security taxes. But you will totally avoid the $ 4,600 self-employment tax with the $ 30,000 deferred distribution.
The company "S" requires a little more paperwork than the property. And you must pay a reasonable salary for your services. This means that you will pay for an outside employee to do the same job. But the IRS is looking for agents who believe that all their income is passed on. The reasonable salary of agents varies depending on the time spent on real estate activities and your location.
N ° 4: FALSE RETIREMENT PLAN
If you want to save more than the current limit of $ 5,000 (over $ 1,000 for taxpayers age 50 and over) for ARIs, you have three choices: Simplified Employee Pensions (SIP), SIMPLE IRA or 401ks. Generally, if you have a company pension plan, it must be available to all your employees and the contribution calculations must be applied in the same way as for you or any employee of the family. .
SEP and SIMPLE IRA are the simplest plans to configure and administer. There is no annual administration or paperwork required. Contributions are paid directly into the retirement accounts of employees. For MS plans, self-employed people can contribute up to 25% of your "net income from self-employment", up to a maximum of 49,000 USD for 2010. For SIMPLE IRA, the maximum contribution for 2010 is USD 11,500 (50 years or more can contribute USD 2,500 additional catch-up.) Simple ARIs may be better suited for part-time or marginal businesses earning less than USD 40,000. You can also hire your spouse and children, who can make SEP or SIMPLE contributions.
For even higher retirement contributions, not limited to 25% of your self-employment income, consider a 401 (k) retirement plan. You can even configure what you call a "solo" or "individual" 401 (k) just for yourself. The 401 (k) is a true "qualified" plan. And the 401 (k) allows you to contribute a lot more money, with much more flexibility, whether it&39;s the SEP or SIMPLE. For 2009, you and your employees can "defer" 100% of your income up to $ 16,500. If you are 50 or older, you can contribute an additional $ 5,500 "catch up". You can also choose to match the contributions of your employees or pay profit-sharing contributions of up to 25% of their salary. This is the same percentage that you can save in your SEP, in addition to the deferral of $ 16,500 or $ 22,000, for a total contribution of up to $ 49,000 per person in 2010. The 401 (k) are usually more difficult to administer. There are anti-discrimination rules to prevent you from completing your own account while you stiffen your employees. Like the SEP and SIMPLE IRA, you can still hire your spouse and contribute to his account.
If you are older and would like to contribute more than the $ 49,000 limit for PSS or 401 (k), consider a traditional defined benefit pension plan in which you can contribute to ensure a maximum annual income of 195 000 USD. Defined benefit plans required annual contributions. But you can combine a defined benefit plan with a 401 (k) or SEP plan to give you a little more flexibility.
5: MISSING FAMILY EMPLOYMENT
Engaging your children and grandchildren can be a great way to reduce taxes on your income by transferring it to someone who pays less.
- The IRS has maintained deductions for children as early as the age of 7.
- Their first earned income of $ 5,700 in 2010 is taxed at zero for the child. This is due to the standard deduction applicable to a single taxpayer, even if you report it as a dependent. Their next $ 8,375 is taxed at only 10%. So you can move some income downstream.
- You must pay them a "reasonable" salary for the service rendered. This is what you would pay to a commercial salesperson for the same service, with an adjustment made based on the age and experience of the child. So, if your 12-year-old son is cutting grass from your rental properties, pay for it at a landscaping service. If your 15-year-old daughter helps you keep your books, pay her a little less than a bookkeeping service can entail.
- To check your return, be sure to write a job description and keep a timesheet.
- Pay by check to be able to document the payment.
- You must deposit the check into an account in the name of the child. But the account can be a ROTH IRA, Section 529 Education Savings Account or a custody account that you control until they are 21 years old.
- If your business is not incorporated, you do not have to withhold social security until you reach the age of 18. So it&39;s really tax free money. You will have to give them a W-2 at the end of the year. But this is painless compared to the tax you will lose if you do not take advantage of this strategy.
6: MISSING MEDICAL EXPENSES
Surveys used to show that the taxes were the main concern of small business owners. But now, health care costs are skyrocketing. If you are a self-employed worker and you pay for your own health insurance, you can deduct this amount as an adjustment to the income shown on page 1 of Form 1040. If you enter the deductions in detail, you can deduct medical and dental expenses. unreimbursed total of more than 7.5% of your adjusted gross income. But most of us do not spend a lot.
But there is a way to crush all your medical bills as professional expenses. This is what is known as a Medical Expense Reimbursement Plan (MERP) or plan under section 105. This is a medical plan. employee benefits, which means that an employee is needed. If you operate your business as a sole proprietorship, partnership, limited liability partnership or corporation S, you are considered a self-employed person and you are not eligible. But if you are married, you can hire your wife. If you are not married, you can do it with a C company. But you do not have to be incorporated. You can do it as a sole proprietorship or LLC by hiring your spouse.
The only exception is Company S. If you own more than 2% of the shares, you and your spouse are considered self-employed for the purposes of this rule. You will have to use another source of income, not taxed as Company S, as the basis of this plan.
Let&39;s say you are an independent real estate agent and have hired your husband. The MERP plan allows you to reimburse your employee for all medical and dental expenses incurred by his entire family, including his wife. All of these expenses are reimbursable: major medical insurance, long-term care coverage, Medicare and Medigap insurance, copayments, deductibles, prescriptions, dental care, vision care, chiropractic care, orthodontists, fertility treatments, specialized schools for l & 39; learning. disabled children, vitamin and herbal supplements, medical supplies and even over-the-counter medications.
You can pay back your employee or pay directly to health care providers. You will need a written plan document and a method to track your expenses. No special report is required. You will save income tax and tax on self-employment.
If you have non-family employees, you should also include them, but you can exclude employees under the age of 25, working less than 35 hours a week, working less than nine months a year, or having worked for you less than three years. Employees who are not part of the family can make it too expensive to repay everyone as generously as you would your own family. However, if you are offering health insurance, you can still use a plan under section 105 to reduce the cost of your employee&39;s benefits. You can do this by opting for a high deductible health care plan and using a plan under section 105 to replace those lost benefits.
For example, a married independent agent and father of two pays 25% of the federal income tax and 15.3% of the tax on self-employment. A traditional insurance plan was replaced by a high deductible – $ 5,000 for the family that reduced his premium by $ 7,620. Thus, even if he reaches the $ 5,000 deductible, he will save $ 2,620 in bonuses. And now, since he deducts his medical expenses from his business income, his tax savings on self-employment add $ 1,156 to his net income. It will save at least $ 3,121 in tax by moving from its traditional health care plan to the medical expense reimbursement plan set out in section 105.
If you can not use a medical expense reimbursement plan, consider new health savings accounts. These arrangements combine a high deductible health care plan with a tax-free savings account to cover unpaid costs.
To be eligible, you will need a "high deductible health care plan", with a deductible of at least $ 1,200 for singles or $ 2,400 for employees and up to $ 1,200 for a single person. a maximum limit of $ 5,950 for singles or $ 11,900 for families in 2010. Neither you nor your spouse may be covered by a "non-deductible health plan" or Medicare. The plan can not provide benefits other than some preventive care benefits until this year&39;s deductible is satisfied. You are not eligible if you are covered by a plan or a separate rider that offers drug benefits before the minimum annual deductible is satisfied.
Once you have established your eligibility, you can open a deductible health savings account. You can pay 100% of your deductible up to $ 3,050 for singles or $ 6,150 for families. You can use it for most types of health insurance, including continuation plans and long term care COBRA. You can also use it for the same type of expenses as a plan under section 105.
The health savings account does not have the same value as the plan under section 105. You have contribution limits in specific dollars and there is no reason for it. 39, tax benefit for self-employment. But health savings accounts can still reduce your overall health care costs.
7: MISS AN OFFICE AT HOME
If your home office is considered your main place of business, you can deduct a portion of your rent, mortgage interest, property taxes, insurance, maintenance and repairs from your home. your home and utilities. You will also depreciate the base of your home for 39 years as a non-residential property.
To be considered your principal place of business, you must (1) use it "exclusively" and "regularly" for administration or management activities, and (2) have no other fixed location where you do business. administration or management of your profession or business. "Regularly" usually means 10 to 12 hours a week. The space does not have to be an entire room.
The percentage of use of your business is calculated by dividing the number of rooms used by the total number of rooms in the house if they are about equal, or by dividing the square footage used by the total area in square feet of the House. Special rules apply when you sell your home, but the home office deduction remains a very valuable deduction for most agents.
8: CAR COSTS / MISSING TRUCK
If you take the standard mileage deduction for your business, you may be seriously escaping. Each year, different surveys on the use of vehicles are published. Costs vary depending on your driving – but if you take the standard deduction for a car costing more than 50 cents / mile, you lose money every time you turn the key. If you take the standard deduction now, you can switch to the "real expenses" method if you own your car, but not if you rent. You also can not spend actual expenses on the standard deduction if you took accelerated depreciation on the vehicle.
9: MISSING MEALS AND ENTERTAINMENT
The rule of thumb is that you can deduct the cost of meals for a legitimate business purpose. This concerns customers, prospects, referral sources and co-workers. And how often do you eat with someone who is not one of these people? For realtors and other professionals who sell, it could be "never". As a general rule, you can deduct 50% of your meals and entertainment as long as they are not "sumptuous or extraordinary".
You do not need receipts for business expenses less than $ 75 (except lodging), but you must record the following information: (1) How much?, (2) When?, (3) Where ?, (4) Commercial object? and (5) business relationship.
You can also deduct entertainment expenses if they occur directly before or after a substantial discussion in good faith directly related to the active conduct of your business. You can deduct the face value of tickets for sporting and theatrical events, food and beverages, parking, taxes and gratuities.
10: FAILURE TO PLAN
Now that you see how much real estate agents, like you, benefit from so much tax relief, you need to understand what is the biggest mistake of all: do not plan. Have you ever heard the saying "If you do not plan, do you plan to fail?" It&39;s a cliché because it&39;s true.
By simply investing your time, you can implement valuable tax-saving strategies that will make all the difference on April 15th.