As a real estate agent, you hustle hard to earn those commissions, but tax season? That can feel like a whole different ballgame. The good news is, there are plenty of tax strategies out there that can help you keep more of your hard-earned money.
Let’s dive into the top 5 tax strategies that can help you maximize your deductions and boost your bottom line.
Understanding How Real Estate Agents Are Taxed
Before we get into the strategies, let’s talk about how you’re taxed as a real estate agent. Since you’re considered self-employed, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes—yep, that’s 15.3%. On top of that, you’ve got federal income tax and possibly state income tax, depending on where you live.
The key to minimizing your tax bill? Keeping track of your income and expenses throughout the year. That way, you’re not scrambling when tax season rolls around.
How Much Should Realtors Set Aside for Taxes?
A common question I get from real estate agents is, “How much should I set aside for taxes?” A good rule of thumb is to set aside 25-30% of your gross income. Of course, this can vary depending on your income, deductions, and state tax laws, but it’s a solid starting point.
By setting aside a portion of your income for taxes, you can avoid any nasty surprises when it’s time to pay Uncle Sam.
5 Tax Strategies for Real Estate Agents to Maximize Deductions
Now that we’ve covered the basics, let’s get into the good stuff—how to save money on your taxes. Here are five strategies that can help you maximize your deductions.
1. Maximizing Home Office Deductions
The What: If you’re working from home, you might be eligible for a home office deduction. To qualify, you need a dedicated space in your home that’s used exclusively for business. This deduction can cover a portion of your rent, utilities, insurance, and even mortgage interest.
The How: You can use the simplified method ($5 per square foot, up to 300 square feet) or the actual expense method. Either way, make sure you’re tracking your expenses carefully.
2. Deducting Vehicle Expenses
The What: If you’re driving around for showings, client meetings, or other business-related activities, you can deduct your vehicle expenses. This includes gas, maintenance, and insurance.
The How: For 2023, the standard mileage deduction is $0.655 per mile. You can also use the actual expense method if you prefer, but you’ll need to keep receipts.
3. Understanding the 20% Pass-Through Deduction
The What: The 20% pass-through deduction is a new deduction that was introduced with the Tax Cuts and Jobs Act of 2017. This deduction allows certain self-employed professionals, including real estate agents, to deduct up to 20% of their qualified business income.
The How: To qualify for this deduction, your income must fall below a certain threshold (which varies depending on your filing status) and you must meet certain requirements. It’s important to work with a qualified tax professional to ensure that you are eligible for this deduction and to maximize your savings.
4. Health Insurance Premiums
The What: If you’re self-employed and your business turned a profit, you can deduct your health insurance premiums. You can also deduct eligible medical expenses that exceed 7.5% of your adjusted gross income.
The How: Claim this deduction on line 17 of Schedule 1. Medical and dental expenses for you, your spouse, and your dependents can be itemized on Schedule A.
5. Meals
The What: Networking is a huge part of being a successful real estate agent, and the IRS lets you deduct 50% of business-related meal costs (or 100% if the meal was purchased from a restaurant in 2022).
The How: Claim this deduction on line 24b of Schedule C. Just make sure you’re keeping detailed records to avoid any red flags with the IRS.
Implement These Tax Strategies for a More Profitable Real Estate Business
By using these tax strategies, you can maximize your deductions and keep more money in your pocket. It’s always a good idea to work with a qualified tax professional to make sure you’re taking advantage of every deduction available to you. For a full list of deductible business expenses, check out IRS Publication 535.
Extra Tax Deduction Tip! Tax Preparation and Accountant Fees
The What: Hiring a professional to help with your taxes is a smart move, and the IRS lets you deduct the cost of tax preparation and accounting services.
The How: You can claim this deduction on line 17 of Schedule C.
Learning about these strategies is one thing, but implementing them? That’s where I come in. At Kim Arden Consulting, we specialize in helping real estate agents like you save money on taxes. Let’s work together to make sure you’re getting every deduction you deserve.
Contact us today to schedule your free consultation.
Frequently Asked Questions (FAQ)
1. What is the home office deduction?
If you use part of your home exclusively for business, you may be eligible for a home office deduction. This can cover a portion of your rent, utilities, and other home-related expenses.
2. How do I deduct vehicle expenses?
You can either use the standard mileage rate ($0.655 per mile for 2023) or the actual expense method. Just make sure to keep detailed records of your business-related driving.
3. What is the 20% pass-through deduction?
This deduction allows self-employed professionals to deduct up to 20% of their qualified business income. There are income limits and other requirements, so it’s best to consult with a tax professional.
4. Can I deduct health insurance premiums?
Yes! If your business turned a profit, you can deduct health insurance premiums for yourself, your spouse, and your dependents.
5. How do I deduct meals?
You can deduct 50% of business-related meal costs, or 100% if the meal was purchased from a restaurant in 2022. Just make sure to keep receipts and records.
6. Can I deduct tax preparation fees?
Absolutely. The IRS allows you to deduct the cost of tax preparation and accounting services on your Schedule C.
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