Whether you’re a full-time or part-time real estate agent, all self-employed workers (independent contractors) have to track their expenses the same way a business would. While that can make tax filing more complicated, you can simplify this process by planning in advance and keeping up with your deductions.
Doing your taxes doesn’t have to be stressful. Here are five incredible tax tips you should use this tax season.
1. Save 30% to 40% of your income
Most real estate agents are considered self-employed, meaning they’re subjected to a 15.3% tax rate and a federal and, sometimes, a state rate. Since the average real estate agent earns $50,000 a year, you may have to pay approximately 40% in taxes depending on the state you live in.
Since real estate agents have the potential to be high earners, and because it’s difficult to truly plan how many homes you sell, it’s better to keep 30% to 40% of your income for tax purposes.
You might even move to a state with a lower income tax rate, if possible, to save more money while you’re building your career. For example, Tennessee, which has a sprawling real estate market, has a flat income tax rate of 1%.
Keep in mind that moving may make your license void, but that isn’t always the case. Some states have reciprocal agreements, which will allow you to sell in more than one state.
2. Save for retirement
Real estate agents likely won’t receive a 401(k) from their employer, but that doesn’t mean they can’t save for retirement. All real estate agents should open up an IRA and fund it every year to increase their nest egg while lowering their tax bracket (and taxable income) at the same time.
3. Take advantage of deductions
Besides retirement plan contribution deductions, there are more than 12 other deductions real estate agents can take advantage of. These deductions include, but aren’t limited to:
- Home office deductions (if you work from home)
- Internet and phone bills deductions
- Health insurance premiums deductions
- Business travel and meals deductions
- Vehicle use deductions
- Loan/credit interest deductions
- Education deductions
- Subscriptions and publications deductions
- Rent deductions (if you own a rental property)
- Business insurance deductions
- Startup costs deductions (in the first year)
- Advertising deductions
You might not be able to deduct from every category on the list, but real estate agents can easily save money on education, home office, internet and phone bills and vehicle usage.
If you want to deduct your business vehicle usage, you have to start tracking that expense immediately. The IRS allows you to calculate your deductions using the standard mileage rate (58.5 cents per mile), but you need to jot down your annual business miles to avoid an audit.
4. Watch your gift-giving credit
It’s common for real estate agents to offer gifts to their clients, but you need to watch how much you spend. You can deduct gifts of up to $25 a year for a single person or $50 a year for a couple. Unless you’re okay with eating the tax costs, avoid buying big-ticket items for clients.
5. Stay on top of quarterly taxes
Self-employed individuals have to start paying their taxes quarterly if they expect to pay $1,000 or more in taxes. Since the average American house sells for a little under $400,000, you’re guaranteed to cross that threshold, no matter how much you charge for commission.
Unless your quarterly filing date lands on the weekend, your due date will be:
- April 15 (for the January 1 to the March 31 payment period)
- June 15 (for the April 1 to the May 31 payment period)
- September 15 (for the June 1 to the August 31 payment period)
- January 15 of the following year (for the September 1 to the December 31 payment period)
To make sure you meet these dates, keep up with your bookkeeping or hire a professional accountant. That means keeping your receipts and invoices in one easy-to-access folder.
The IRS won’t inform you if you have to file quarterly taxes until they’re way past due, and the IRS won’t take ignorance as an excuse. If you think you won’t be able to make your tax due date, apply for an extension. If you miss one, pay it off right away to avoid a fee.
Ken Boyd is an accounting and finance expert at AIS-CPA.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners. Information in this article does not constitute legal or financial advice. Alway seek the help of an accountant or CPA.
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