While tax planning is a year-round task, real estate agents can take some specific actions before the New Year to significantly cut their taxable income. Use these seven strategies to avoid overpaying taxes, save money, and better manage your business.
1. Identify business deductions
Every business has ordinary and necessary costs, such as office equipment, marketing, accounting, and insurance, that are tax-deductible. If you don’t flag them throughout the year, take the time to identify them now so you’ll have less work to do later.
Run reports to double-check that you’ve categorized costs correctly and adjust if needed. Note that tax-deductible business expenses can change from year to year. So, familiarize yourself with the list of allowable deductions in Publication 535, Business Expenses.
2. Claim the home office deduction
In addition to deductible business expenses, you can claim the home office deduction if you primarily run your business from a dedicated home office. Many entrepreneurs don’t realize that even if you have a day job and run a part-time business from home, you qualify to claim the deduction whether you’re a homeowner or renter.
Your home office doesn’t have to be the only place you work or meet customers to qualify for the deduction. For instance, you might also work at a coffee shop, co-working space, and meet clients in their homes.
Direct expenses for your office area, such as flooring, furniture, window treatments, or an additional phone line, are 100% deductible. However, exterior improvements, such as landscaping or installing a pool, typically aren’t deductible.
You may also deduct a portion of expenses for your home, such as rent, mortgage interest, property taxes, insurance, cleaning, and utilities, known as indirect office expenses. They’re partially deductible based on your home office size and calculation method.
The standard method requires you to calculate the size of your office as a percentage of your home and apply it to your expenses. For example, if your office is 10% of your home, you can attribute 10% of qualifying expenses (such as your homeowners insurance and power bill) to business use.
Or, you might choose the simplified method, which allows you to claim $5 per square foot of your office area, up to 300 square feet. It eliminates having to keep detailed records but won’t give you the largest deduction if your office exceeds 300 square feet.
If you’re eligible to claim the home office deduction, it’s a terrific way to make certain personal expenses partially deductible. Use Form 8829, Expenses for Business Use of Your Home, to determine the allowable costs and enter them on Schedule C, Profit or Loss From Business, when you file taxes. See Publication 587, Business Use of Your Home, for more details.
3. Claim business vehicle use
Most real estate professionals use their personal vehicle for business, allowing you to deduct expenses based on mileage. That means keeping detailed records to allocate business versus personal miles driven. However, if your vehicle is used exclusively for business, you can deduct all its costs.
Your deduction depends on your chosen calculation method, using actual expenses or a standard mileage rate. Generally, the more expensive your vehicle is to operate, the higher your deduction will be using the actual cost method.
For 2023, the rate for business use is 65.5 cents per mile. For instance, if you drove 1,000 miles annually for business purposes, your vehicle deduction would be $655 (1,000 x $0.655). You may come out ahead for more economical cars using the standard mileage deduction.
Check out Publication 463, Travel, Entertainment, Gift, and Car Expenses, for more information on vehicle deductions.
4. Contribute to a retirement account
If you haven’t opened a retirement account, such as an IRA, SEP-IRA, or solo 401(k), don’t miss the opportunity to cut taxes and start building wealth before year-end. The benefit depends on how much you contribute and your account type.
For 2023, the maximum IRA contribution is $6,500 or $7,500 if you’re over 50. If you contribute $6,500 to a traditional IRA by your tax filing deadline (mid-April or mid-October if you file an extension), you reduce your taxable income by that amount.
Self-employed retirement accounts, such as a SEP-IRA and solo 401(k), allow contributions of up to 25% of your net business earnings up to $66,000. That gives you a much larger potential tax deduction.
5. Max out a health savings account (HSA)
If you have a high deductible, HSA-qualified health plan purchased on your own or through your or a spouse’s employer, you can open an HSA. Like a traditional IRA, HSA contributions made by your tax filing deadline are deductible for the current year.
What’s terrific about an HSA is that your funds can be invested for tax-free growth. Plus, when you spend it on qualified healthcare costs, your withdrawals are entirely tax-free. That significantly cuts the long list of medical expenses you’ll find in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
6. Buy business equipment
If you’ve been considering buying equipment for your business, such as a computer, machinery, or vehicle, consider doing it before the end of the year. In some cases, you may be able to deduct the entire cost this year instead of depreciating it over several years.
Review Publication 946, How to Depreciate Property, and consult with a certified tax accountant if you purchased business assets or are considering them.
7. Time your business income and expenses
Timing your income and expenses involves legitimately moving them from one year to another to pay the least in taxes. For instance, if you defer business income until January, you reduce earnings in the current year.
To reduce your taxable income, you might accelerate or prepay certain business expenses before the New Year–such as real estate continuing education, memberships, and auto insurance. If you mail payments or make credit card charges in the current year, you can deduct them.
A wise strategy for cutting taxes before the year-end is getting guidance from a certified tax professional. Their advice can pay off in the long run if it helps you get organized and reduce your taxable income for the year. It’s up to you (and your tax pro) to make smart moves now to avoid potential tax mistakes and save as much money as possible.
Laura Adams is the author and host of the Money Girl podcast.
This content should not be considered accounting or legal advice. You should consult your local tax or legal professional in your state for appropriate strategies.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
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