Why It’s So Important to Do Year-End Tax Planning
Once December 31st has come and gone, your tax liability for the tax year will be set in stone.
Until then, and especially now that your final tax picture for the year is becoming clearer, year-end tax planning presents a unique last chance to lower your tax bill. This frees up more money for you to fund your real estate and business investments. This is an investment in time well worth considering!
Tax preparation for the March 15th or April 15th return is not considered advance tax planning. It is merely tax compliance as opposed to voluntary tax reduction planning.
Though returns aren’t due until April, they cover a tax year that ends Dec. 31. Some of the best tax-reduction moves really need to be done by mid-November or early December. They often take some planning.
Getting a head start could make you a lot happier in April, potentially resulting in a bigger refund or a smaller check to write to Uncle Sam. By taking certain steps now, before the year draws to a close, you can reduce the size of your tax bill otherwise due when you file your return next year.
Year-End Tax Saving Tips for Real Estate Investors
At this time of year, real estate investors, landlords, property owners, and vacation owners need to take advantage of tax-saving opportunities. Tax planning should be a priority so you can reap the rewards when tax filing time rolls around. Here are some year-end tax strategies to use, but you must take action before December 31st.
Rental Income
To prepare for any future tax hikes, you should accelerate any rental income by receiving January rental income in December. Income timing can be difficult, though, and you should consider its impact on various deductions.
Rental Expenses
You can accelerate many types of rental expenses, such as paying bills early and buying equipment or services needed for the rental property business. Your expenses can include: printing, memberships, insurance, real estate education, cell phone services, and adverts. Don’t forget your largest deductible expense, which is the mortgage – you can prepay the January mortgage to increase your interest expenses. If you hire employees, you can also prepay social security, Medicare, and unemployment taxes.
Last Minute Year-End Tax Tips
There’s not much of the year left, and many people are scrambling to save whatever they can on their taxes. Yes, it’s quite possible to save a ton of money before the year is out and start the new year fresh, ready to focus on wealth building.
Here are some strategies you can use to save those last minute bucks.
1. Start a business. If you don’t already have a business, consider starting one before December 31st. You could convert your real estate practice into an LLC and get deductions for business expenses. Plus, you can get some relief from the Alternative Minimum Tax (AMT)
2. Check your AMT status. AMT is catching more and more individuals. Those who happen to have significant deductions – those living in a state with a relatively high personal income tax rate and high real estate taxes – are vulnerable. The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum.
3. Employ your children. Yes really! This is a tax deduction for your business, and it will keep everyone happy: you, the IRS, and even your kids. Just make sure you stick to the rules: written job description, time-sheet records, and pay in line with current market rates.
4. Settle on a rental property by December 31st. You’ll be entitled to depreciation deductions, plus you can incur rental property expenses such as utilities, repairs, and insurance.
5. Accelerate Business expenses. You don’t need to invest in anything you don’t need, but you can prepay some regular expenses such as rent, insurance, and taxes. You can prepay for up to 3 months and take the deduction.
Top Reasons Why You Should Set up a Solo 401 (k) as part of your Year-End Tax Planning
What is a Solo 401 (k)?
A Solo 401 (k) is a great retirement plan for self-employed individuals or business owners with no employees or part-time employees only. Business types such as sole proprietorships, family businesses, partnerships, and corporations can take advantage of what the Solo 401 (k) has to offer–maximized savings at a low cost and the flexibility to invest in traditional and alternative investments tax-free or by deferring taxes.
Many features of the solo 401 (k) make it attractive to business owners:
Alternative Assets & Equity Investments
A Solo 401 (k) allows you to invest in many types of investments, including stocks, mutual funds, real estate, hedge funds, gold, private loans, private equity, and more.
Year-End Tax Tips for Business Owners and Individuals that Could Save a Lot of Money
Tax planning does not have to be as dreadful as some people will have you believe if you know how to plan and what to consider when planning for your taxes. This is probably one of the most important and consistent financial issues you will face. It is a good idea to stay abreast of your tax obligations and responsibilities. Whether you are an individual taxpayer or business owner, a tax professional has the knowledge and experience to make the task as beneficial for you as possible.
Plain vanilla year-end tax planning strategies suggest that all taxpayers should generally defer income and accelerate expenses in order to reduce current-year taxable income and tax liabilities. But the AMT (Alternative Minimum Tax) is becoming an increasingly big problem, turning most tax planning logic upside-down.
Alternative Minimum Tax
AMT is catching more and more individuals. Those who happen to have significant deductions – those living in a state with a relatively high personal income tax rate and high real estate taxes – are vulnerable. The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum.
Reducing regular tax liability through deductions, deferral and overall rate reductions has increased the AMT liability exposure. All planning must consider multiple years to be truly effective. While a credit for prior-year AMT may be available against regular income tax in a subsequent year, there is no guarantee that the AMT will ever be recovered.
TOP TEN YEAR-END TAX PLANNING CHECKLIST
1. If you own a business, do you have an EIN, an operating agreement, and a separate bank account?
2. Have you recorded all the income and expenses related to the business on the business bank account? This is a huge audit item.
3. If you own investment property that was foreclosed or sold as a short sale, have you considered the impact of the cancellation of debt income on your individual income taxes? Have you calculated the loss of sales of investment property?
4. If you generated any kind of active real estate income, have you considered restructuring your business to minimize the impact of self-employment taxes?
5. If you have significant real estate education expenses, have you registered a business to minimize your audit exposure on deducting these expenses?
6. If you have significant business expenses and already have a registered business, have you considered converting to a partnership to avoid an audit flag?
7. For homes that have been repossessed, do you know the rules on recourse vs. non-recourse debt?
8. Do you understand what your tax filing requirements are for the states where your business is registered, such as annual filing, personal property tax returns, etc.?
9. If you own investment property, have you considered doing a cost-segregation study to increase your depreciation expense?
10. If you bought or sold property this year, have you considered the impact of capital gains, adding rehab expenses to the basis of the property, and whether the holding costs (mortgage interest, taxes, and insurance) are deductible?
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at Ultimate Wealth Building Plan.
