Realtors Who Plan Ahead Will Save Taxes

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Realtors can reap substantial tax savings with these easy to follow tax tips.

“As a real estate agent or broker, keeping careful track of the bills you pay throughout the year will save you taxes, since you can generally deduct your professional expenses directly against your commission income,” explains Andrew Schwartz, CPA, founder of RealEstateProTaxes.com, an affiliation of CPAs throughout the country that specializes in tax planning and preparation for real estate professionals. "Whether you use a personal finance program like Quicken or Microsoft Money, charge all your professional expenses on a separate credit card, or file away all your receipts in a big envelope, it's important that you find a system that works for you," says 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, and MLS fees. A complete listing of professional expenses common to realtors is available at http://www.reptaxes.com/busexp.php.

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.”

Don't Forget Your Car

Deducting 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 44.5 cents per business mile driven for 2006. Don’t forget to claim the business use percentage of the interest you pay on your car loan as well.

It's a good idea to maintain some sort of mileage log throughout the year. If you ever get audited, the IRS will want you to provide a log substantiating the automobile deduction you claimed.

Employ Your Child

Do 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 2006, as long as your child is under the age of 18, you can pay him or her up to $5,150, 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. Plus, your child can fund an IRA or Roth IRA with up to $4,000 this year based on the wages paid by you.

Now's the time to set yourself up with the IRS as an employer if you haven't previously done so, and to compensate your child a “fair wage” for services provided during the year.

Save Taxes By Saving For Retirement

Setting up a self-employed retirement plan is another way to save 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 as much as $15,000 ($20,000 if 50 or older) plus 20% of your net self-employment income, up to $44,000 for 2006. If you’re 50 or older, this year’s max increases to $49,000. Amounts contributed reduce your taxable income and grow tax-deferred. The deadline for setting up a Solo 401(k) is December 31st.

You also have the option of setting up a Roth 401(k) this year. With these types of accounts, you forgo a tax deduction today, but the money contributed grows tax-free.

With a SIMPLE IRA, you can contribute up to $10,000 ($12,500 if 50 or older) plus 3% of your net business income. The due date for establishing a SIMPLE IRA is October 1st.

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, planning ahead will ensure that you're 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 throughout the year so you'll meet these two requirements.

Avoid Underpayment Penalties

As an independent contractor, it's usually up to you to pay your own taxes by submitting quarterly estimates. Failure to pay sufficient estimates in a timely manner could lead to costly IRS penalties.

Get in the habit of setting aside a portion of each of your commission checks into a savings or money market account for your taxes. Not only will you avoid spending your tax money, you'll also be rewarded with a little interest income as well.

Get A Jump on Your 2006 Planning:

"Even though you probably haven't filed your 2005 income tax returns yet, it's not too early to start taking steps to cut your 2006 tax bill," says Schwartz.

Andrew D. Schwartz, CPA is the editor and a major contributor to http://www.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. He is available for interviews.

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Stacy Gillis