If you had a blockbuster year in your real estate business, you need to ensure that you have a financial plan in place. CFP Jordan Curnutt offers some key tax planning strategies to consider.

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Are you crushing it in your real estate business? If, like many real estate professionals, you hit an all-time-best gross commission income (GCI) in 2021, these tax planning action items are for you.

Remember, failure to take action with smart tax planning can come back to bite you in the bottom line, both in the short term and long term. Talk to your accountant or financial planner to determine which strategies make the most sense for your business.

1. Backdoor Roth IRA strategy

The backdoor Roth IRA strategy is designed for individuals in the upper levels of the federal income tax bracket schedule.  

As of 2021, if a married filing jointly taxpayer has in excess of $208,000 in income for the year, they are disqualified from being able to contribute to a Roth IRA account.

This is important because contributions to a Roth IRA offer growth on a tax-free basis and allow for many significant tax advantages in the long run. 

Due to the income limitation, many top producers miss out on making contributions to a Roth IRA. This is where the backdoor Roth IRA strategy comes in.

By following a specific sequence of steps, which include funding a nondeductible IRA and then processing a Roth conversion, you can successfully fund your Roth IRA every year completely aboveboard — even with an income in excess of the usual Roth IRA income limitations.

The process for properly executing this strategy can quickly become complex and is not the right fit for everyone. 

You will want to plan with your financial adviser and certified public accountant (CPA) to verify if this strategy is suitable for your unique situation, but it should certainly be at the top of the list for tax planning opportunities to consider.

Tax deadlines

There are two tax deadlines to be aware of when implementing the backdoor Roth IRA strategy. 

First, the contribution deadline for any given tax year is all the way until you file your taxes, typically April 15.

Second, the conversion deadline is Dec. 31 of each year:  meaning, the Roth conversion element of the backdoor Roth IRA strategy must have been completed within the calendar year.

2. Charitable giving

Reminder: Don’t give up on reporting your contributions.

In 2018, the Tax Cuts and Jobs Act doubled the standard deduction available for taxpayers to claim each year. In 2021, a married filing jointly couple would be eligible for a standard deduction of $25,100.

As a result, recent data shows that about 90 percent of taxpayers now claim the standard deduction, as opposed to taking the itemized deduction, as many did in the past. (You are entitled to the greater of the two.)

Since charitable giving falls into the itemized deductions category for tax reporting purposes, most Americans unfortunately no longer receive any tax benefit for their charitable giving. Without the added tax incentive, many stopped reporting charitable contributions altogether.

In 2020, the CARES Act brought back a small benefit for the charitably inclined who still take the standard deduction. This is the ability for a married filing jointly couple to take the standard deduction and still claim an additional $600 deduction (for the year 2021) for qualified charitable gifts.  

Tax deadlines

Charitable giving must occur within the tax year it is being claimed.

3. Estimated tax payments

All-time GCI = All-time taxes

Typically, an all-time best GCI year means an all-time-high tax year: Meaning, if you are crushing it this year, this is a good time to make sure your financial planner and CPA are up to date on your income level.

The primary goal of making estimated tax payments is to avoid generating a tax penalty for underpaying throughout the year.

Below is the two-pronged safe harbor for avoiding a tax penalty for underpayment:

  • At least 90 percent of the tax for the current year, or
  • 100 percent of the tax shown on the return for the prior year, whichever is smaller

Once you have confirmed you will not accumulate a penalty, (which, in the case of an all-time-best GCI year would be verified by paying in at least 100 percent of last year’s tax liability) you want to start planning for the additional tax bill.

For cash flow purposes, you might feel comfortable paying beyond your safe harbor amount to avoid a large chunk of tax liability being due all at once on April 15 of the following year.

Lastly, here are a couple tips to make paying your estimated taxes easier, so instead of spending time on your taxes, you can focus your time where you want to focus it — on your business.

Top Producer Tip #1: Make an electronic payment. The IRS is extremely backlogged on the paper side of things right now.

Top Producer Tip #2: Change the last dollar of each payment to reflect the corresponding quarter. If the IRS gets its wires  crossed, and you need to resolve a discrepancy, you can easily identify what payment the agency is missing.

Example: $10,001, $10,002, $10,003, $10,004

Tax deadlines

For tax year 2022, the estimated payment due dates are: April 18, June 15, Sept. 15, and Jan.17, 2023.

4. Consider switching to an S Corporation in 2022

When to make the jump

One of my peers, certified financial planner Matthew Jarvis,  sums up tax planning well by stating: 

“My job is to make sure that you pay the IRS every dollar that you owe, but that you don’t leave them a tip.”

If you are a rising star in the real estate business, one of the big tax decisions to evaluate is if and when you will make the jump from an LLC or sole proprietor to an S Corporation.

This is a crucial decision that you will want to bring in your financial team for. This team of trusted advisers will usually consist of your attorney, CPA and financial planner, with each playing their own role in helping you make the right call for you. 

While there are several angles to this decision, the financial side of things revolves around evaluating the following two factors:

Extra costs and hassle versus massive potential tax savings

Extra costs would include:

  • Hiring a CPA if you have not already
  • Enlisting the CPA’s services to help you with payroll
  • Filing a separate tax return for your business each year

Massive potential tax savings would include:

  • S Corporations act as a “pass-through” entity and avoid double taxation.
  • S Corporations allow your business to pay out a dividend to you, the business owner.
  • By earning less salary and instead earning a dividend, FICA taxes can be saved.

FICA, a federal payroll tax, equates to an additional 15.3 percent tax above and beyond the federal income taxes that individuals pay. Multiply your all-time-best GCI by 15.3 percent and you quickly realize the massive potential tax savings here.

Tax deadlines

The action item here is to begin planning for 2022. Start the discussion now with your financial team to get your business entity selected and in place for next tax year. 

5. Establish your solo 401k now

Turbo charge your retirement savings

While a SEP IRA is a great place to start, the solo 401k has some big advantages, particularly for high income Top Producers. 

Remember that whole backdoor Roth IRA strategy we already went over? The same tax treatment is available via a solo 401k, if designed properly.

Solo 401k plans can specify in the plan document if they will allow for Roth contributions. And here is the best part: Solo 401k plans have drastically higher contribution limits than an IRA account. 

Here’s the breakdown:

Solo 401k contribution limits for tax year 2021

  • employee contribution: $19,500
  • employer contribution: $38,500
  • total contribution Limit: $58,000*

*Those age 50 and older are entitled to an additional catch-up contribution of $6,500 beyond the standard contribution limit of $58,000.

Every dollar you contribute to a Roth solo 401k will have the benefit of tax-free growth within the account. By contrast, a traditional solo 401k contribution will have taxable withdrawals in the future. In exchange for being taxable down the road, you are able to take a deduction to your earned income for every dollar you contribute.

While they both have their benefits, your unique situation will determine how best you should be allocating your retirement contributions.

Regardless of the style of solo 40k plan you select, the driving force behind your financial success will be that fact that you are saving to begin with.

Tax deadlines

You do not need to make the contribution until you file your taxes, but the plan must be established prior to year-end.

A final note: The tax planning strategies outlined here can be complex to implement. Collaborate with your CPA and financial planner to verify that each strategy is properly executed.

Jordan Curnutt, CFP, is a Certified Financial Planner professional for top producing real estate professionals who want to strategically manage their wealth, optimize variable income, build a balanced net worth, and mitigate what is likely their biggest personal expense, taxes. Reach out to Jordan on Facebook, Instagram and LinkedIn.

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