EP 008 - How to Determine If You’re Overpaying in Taxes

How to Determine If You’re Overpaying in Taxes on Your Real Estate Investments and Business

I meet so many people who have no idea what their tax returns mean, and are uncertain if they are paying the right amount in taxes. If you haven't had a chance to review your tax return with a CPA, and fully examine what everything means, and I'll walk you through how to identify any missed tax saving opportunities. Bring your return before you press play!

Transcript

SPEAKER_00 0:20

Welcome everybody. I'm glad you can attend this. I'm creating this webinar because I get so many inquiries. I find so many people are confused after tax season because they never really have a great chance to make sense of what their preparer has returned or their self-prepared returns. Maybe they're in a they don't have enough time, and um they never really get the chance to dissect and analyze and examine what's going on in their returns and identify any errors or tax saving opportunities. Probably going to record this again, like I said, uh at the end of next of this uh upcoming well, the 20 the 2020 tax season, uh, just so you can all have an understanding of what this all means and how to identify missed opportunities. Now, if you're interested in a more detailed examination, I perform perform that for free for all my prospective clients or just contacts who may not be ready to be clients. Uh, if you're interested in that, you can just email me for a free discovery session. That link is going to be in the chats and also in the live version of this, it will be in the comments. So, but this is gonna give you just some basic things that you can look at, and I'm about to show you just a blank 1040 and some schedules that'll be on your 1040, and uh we're gonna walk through everything. Okay, all right. Here is everybody's favorite document and thing to look at the 1040. All right, so on the 1040, here we have obviously some of the basic information I'm gonna walk you through, right? We have your name, your status, social security, all that great stuff. Make sure you list your dependents. Now, when we think about our when we think about tax savings opportunities or maybe missed opportunities, one thing we want to think about is where are the what is your source of other income. So what is what is the other income that you have? Uh that amount is is gonna come on line seven. So here we have our wages from our jobs, and then on seven A we have that other income, which is from the results of perhaps your side hustles or your real estate investing opportunities. If you have that Schedule C, which we'll look at earlier, uh the sums of that will all be show up on there, and we'll dive into that later. We also want to look at here's a big one, and you don't even need to own a business to consider this. Uh, the standard deduction or the itemized deduction. I have seen errors here where people didn't realize that they can save more money if they elect the itemized deduction. I'll walk you through that later on, but that's basically if you decide to bypass that standard deduction, have more write-offs with writing off your interest uh and your state taxes against your federal taxes. When I say interest, I meant mortgage interest. And um, qualified business income deduction. Now, this is something new, and I had a client I have right now, his prior CPA was pretty old and was towards the end of his career, wasn't really interested in learning a whole lot of new things. So, this qualified business inconduct uh income deduction is a 20% deduction off of your business activities that are trader business, simplified definition. Anyways, this uh veteran accountant did uh okay, I'm getting distracted by the cat. This veteran accountant um did not allow uh did not choose to elect the QBI deduction, and my client missed out on about $25,000 for deductions. Make sure if you are a self-preparer and you have positive taxable income from your real estate or your real estate agent that you're taking advantage of this QBI deduction. All right, and the next thing I want to talk about here on the is just your schedule one. Not a whole lot here, but I want you to think about your schedule C. You're gonna see just a sum totals uh here on part one, on part two. We have the possibility of some additional write-offs. If we have an HSA, that is a deduction. Basically, what you do here is uh if you have a high ink a high deduction health plan, you put money into the HSA, it defers your taxes like a 401k. When you take money out into your health spendings, that money is untaxed, so it's it combines the benefits of the 401k and the Roth. You can't use this for your insurance premiums, but you can use this for your over-the-counter drugs, prescription drugs, anything not covered by your insurance. And how about this? If you're self-employed, uh you have you can also deduct your health insurance premiums. If you are a W-2 worker, you can only deduct possibly a limit within certain thresholds that we'll get to if you itemize. But think about this: a lot of people forget and overlook this really valuable deduction. It is a self-employed health insurance deduction. So, right there, two opportunities to uh increase your deductions through your medical expenses. Schedule two. Now, not a whole lot here, but I want you guys to pay attention to self-employment tax. This is brutal, especially for you real estate agents, independent contractors, sole proprietors. The self-employment tax is brutal. It's 15.3 percent on your first $135,700. That amount is in addition to your federal and state taxes, and only 50% of it is deductible against your federal taxes. A lot of my clients, we will find that we actually pay more in self-employment tax than we do in federal and state taxes, if especially some real estate agents getting started. So, what we want to think about there is um some ways we can reduce self-employment taxes, obviously, with write-ups to offset that self-employment income. Also, there are entities we can create and work under. It could be a C Corp or an S Corp, depending on what works best for you, and those things as well will reduce your SE tax. Now that you are aware of this, I want you to look in your tax returns and if you're paying any self-employment tax. Uh, I want you to be aware of that. And here's an opportunity to consider any uh any strategies here where we can reduce that tax. Now, um let me know if I'm going too fast. I'm gonna try to make this digestible if you guys are walking through your returns. I want you guys to really understand this. But I've put some red boxes over this so you can hopefully easily identify and and match up what's in the presentation with uh with what I'm with what you have on your own returns. Now, if this is a little obviously, if this is the recorded version, uh you will be able to slow it down. But uh, I'm hoping this is going at a great speed, and feel free to give me your comments in the chat. Now, the next topic I want us to discuss are our itemized deductions as mentioned earlier. Uh, if we reach that beyond that 7.5 threshold from your income, uh, we can also uh deduct some of your medical expenses. This is if you have a job, this really will be more impactful. Most people will not be able to deduct their medical expenses if they are W-2 employees, unless we use that HSA. Um, taxes that we've paid, obviously. Now, with the Tax Cut and Jobs Act, this might change with Biden. I'll probably have to re-record this next year because a lot of this might not even be relevant. So, to those of you who listen to the recorded version, we are in the year of 2019 and there might be a lot of changes. Anyways, uh, so um the state taxes, we can deduct $10,000 of those state and local and property taxes against our federal income. That's a maximum amount. If we itemize, um, and here we can see that, and also um interest that we pay for our mortgage and our charity charitable deductions as well, or itemized deductions only if we itemize and elect out of that standard deduction. If you have a significant amount of itemized expenses, you want to make sure you're keeping track of this or at least considering this compared to your standard deduction. Now let's look at the schedule C. Now we're gonna dive into some things that are specific for business owners. So even if you have a side hustle or maybe you're a full-time sole proprietor, as I mentioned earlier, you are likely to record your income on the Schedule C. One thing that a lot of people overlook is material participation. So let's say you have a side hustle or you have ownership or in some sort of business, you want to see if you materially participate. Reason why is if you do not materially, it's a hard word to say, materially participate, now this income is treated as passive. If you have passive income, you don't have to worry about that dreaded, painful self-employment tax. However, one of the benefits if you do materially participate, and most of you will materially participate in your Schedule C activities, if you are operating at a loss, that loss could potentially offset other sources of active income. Because if you materially participate in this type of income, it is active. One of the things you also want to think about here is depreciation. And I find myself talking about depreciation so much for what I do because it is so much underappreciated, and there is so much we can do to maximize our depreciation. I have a whole webinar just on depreciation. You can find it on my website and my YouTube channel. We want to think about if there were opportunities to elect bonus depreciation in Section 179, you're purchasing some equipment. One of the strategies we can do is we can even finance equipment and still write it all off. Uh, and even some vehicles, we can write elect bonus depreciation, write that all off towards the end of the year, get some massive deductions to offset that active income. Another thing, there are lots of strategies here for your travel. Make sure you're writing off your travel. We can potentially find business purposes in our vacation and in our write-off a portion of that travel, including the airfare and the hotels. Lots of tax savings opportunities here that you want to keep track and know what you can write off. So you want to go through this and make sure that you go through each item and think about what are your potential write-offs here. And maybe if you're concerned, if maybe you don't know if you were tracking things properly, we can give an initial consultation and help you identify that all the write-offs here are being recognized. Now, one thing we also want to think about here is what is the net income that we are generating. Your net profit here is going to be on line 31. And we want to think about how much that amount is. Once we reach a certain threshold, depending on the activity, we want to start considering per potentially creating an S Corp or C Corp for that activity. To right now, we can bring that activity into that flat 21% corporate rate that might change soon. Uh, and also the S-Corp can help reduce some of that, as I was discussing earlier, that dreaded self-employment tax. Also, here uh here's the opportunity uh just for vehicle. If you have here on part four of the Schedule C, if you have a vehicle, we could potentially like bonus appreciation or depreciate that vehicle. If that will give you a greater write-off than the standard mileage rate. Standard mileage rate is 58 cents per mile. If you are interested in uh finding a way to record that mileage in a way that is easy and compliant with the internal revenue code, go to my site or email me. I have an easy template based on the qualifications of the information uh that the IRS requests to keep for records. Super easy, it'll subtotal and show you all the um the total amount of write-offs uh based on your mileage, and you we can even classify it into different activities and schedules with that template. Next, schedule D, capital gains and losses. Uh, this one I don't want to spend too much time over, but if you do have capital gains before you are in engaging in activity that will trigger capital gains tax, we want to do some planning. Even capital losses. There are tons of things that we can do to reduce your capital gains tax. Um, to name a few, we obviously have the 1031 exchange for now. Um, there are other things such as monetary installment trusts, family endowment plans, or if we have some capital losses, we can free those up potentially and maybe sell some stocks at a loss to offset upcoming capital gains. Lots of planning opportunities here to do. So, all you want to think about is if you had some major transactions and you didn't do any planning around that and incurred capital gains tax, there might have been some missed opportunities to offset those capital gains taxes. Another thing we want to think about, especially with real estate, if you're selling that real estate, is you're best off waiting at least a year so we can get taxed at our favorable long-term capital gains tax rate. If you have it under the under a year, it's gonna be taxed at your short-term capital gains rate, which is the same as your uh your regular marginal tax bracket. So if you didn't wait a year, if you're on the threshold, you might be overpaying some taxes here as well. Now let's look at our schedule E. I spend many, many hours of my life looking at schedule E's and creating schedule E's. This is for partnership of interests, S Corp interests, and real estate. So turn to your schedule E's. Let's all turn to that real quick. I'm gonna give you a little bit of time here if you want to go um use a control F function, but let's look at the schedule E. If I'm going a little too fast for some of you, this the recorded version will be on my YouTube page and my website. I'll email it to all the RSVPs and attendees as well. But let's all turn to our schedule E's if you own real estate. Also, as I'm talking, put your questions in the chat. I will address them at the end when I'm sharing the screen. It will not let me see the questions. Here are some things we want to consider with the schedule e and when we're evaluating uh whether you are whether or not you're overpaying in taxes. First off, we want to look at again the major thing is depreciation here, folks. Has your CPA recorded the amount of depreciation? If you're yourself a preparer, are you confident that you have recorded the proper amount of depreciation? There are several variables that we can use, and it is open to interpretation on what our depreciable basis is. Has your CPA considered cost segregation, or does he or she even know what cost segregation is? Lots of opportunities here to increase our depreciation deduction. Is it worth it? Well, it depends. We might be able to get that passive losses to offset active income in certain circumstances. We might be able to create passive income through some spin-off entities or failing that material participation test where the losses created through depreciation and cost segregation can offset other passive incomes. We also want to consider the real estate professional tax status. Very important. So here we have on line 26. Before we get into the real estate professional tax status, let's look at the total rental and royalty income and what the net effect is on that. What we want to think about here is you should not be paying taxes on your real estate investments, especially nowadays with bonus depreciation available. Depreciation is a non-cash expense. There are things we can do to recognize more depreciation in case your margins are so great that you're actually paying taxes on your passive income. We can utilize and optimize depreciation. So the revenue that you're bringing in, even if you have a cash-flowing real estate rental portfolio, you will not be paying taxes on your real estate rental income with a proper tax plan. So if you are paying taxes on your real real estate rentals, you're probably missing out on some opportunities. Another thing we want to think about here is when we have partnership shares and S-Corp shares of income. Here, as we can see, we are classifying our interest in partnership activity and our interest in S-Corp activity here. So here uh right here on part two of the schedule E. Have you considered whether you are actively or passively participating in your partnerships and what are the impacts of that? Um, so here might be some planning opportunities. Let's say you have shares in a partnership where you're not doing a whole lot. Um, you could potentially uh classify this as passive income. And remember, as I discussed earlier, your real estate rental income is creating passive losses through depreciation, and that could offset your passive income from your shares in a partnership. So if you're not even thinking about this and planning for this, uh here's another opportunity. And also, if you have partnership shares that is creating active income, that active income is going to be subject to self-employment tax. So here's another way that we might want to consider the S Corp. If you're in a higher tax bracket, the C Corp can help you out with that. Now, I don't want to go on too much of a tangent here, but the C Corp, obviously, we have that flat tax rate, but we also have to consider that double taxation, the 15% on the dividend tax. So, there, what are some ways we can take money out of the C Corp? Fringe benefits. We can borrow from the C Corp. We can also provide, you know, so with the fringe benefits, there are ways that we can provide different services that are deductible from that C corporation. Other things we can do, hiring the family, fantastic way to ship that money to people with in lower income tax brackets. And uh, you know, as I said earlier, borrowing from the C Corp, you can borrow from the C Corp and use that money to free it up, take it out of the C Corp, and invest into other uh productive business activities. Here's another thing I want you guys to consider the business use of your home. Form 8829 is what a lot of people use to do that. Make sure you are if you are deducting your home office, now that home office has to be dedicated to the business purpose of whatever it is. Um, even if you have a W2 income job, you can still have a home office for dedicated to your side hustle. Maybe you even have business use for your home office to store equipment for your rental properties. Totally fine. Now, if we are having the home office, we want to consider the depreciation of that home as an expense that we can use to further reduce your taxable income from your business and your real estate. Another thing that we want to consider here is um the state taxes from your home office. Remember, I was talking about earlier, we have that $10,000 limit on uh state and local taxes against your W against your federal income. If it's a home office and it's used for business, now we can bypass that limitation and deduct more of that state tax against your federal tax here. So you want to consider this when you're calculating your home office deduction. So that's all I wanted to share for you at a at a high level. And I'm now gonna, you know, I want you guys if you have questions in the chat, I want you to post your questions. Trying to make this a little bit short and sweet. I hope I wasn't going too fast here. Uh, if you have any questions, but feel free to post them. And and and also you can follow up with me. Um, my I'm gonna post my email in the chat. Would love to hear from you. And if you what I do, as I was discussed earlier, is I do a more formalized and in-depth tax assessment for all my prospective clients and people in my network. So, what I want you to do is if you are interested in me looking at your tax returns, you can send me an email and set up a call, and we can all discuss. Uh, you know, we'll set up a time to dive through and see if we're missing any tax saving opportunities on your return and the possibility of maybe incorporating a tax plan. Uh, we have some questions coming in, just keep on writing them. Um, my I also before I answer the questions, I want to let you know, I want to let you know that we're doing uh another live webinar on how to determine if you need a tax plan. Tax plan is a higher-end service where we can, it's instead of being a tax preparation engagement, the tax planning is a long-term forward-looking engagement where we are anticipating and planning for potential tax liabilities and doing what we can before the year even starts to reduce your taxes. So at the end of the year, you know you're doing everything you can to reduce your tax liabilities. So, um, first real estate broker plus property manager with a full-time W-2 job. Why choose the S Corp? So that's a good question. And whether or not an S-corp uh is useful for you if you are a broker and property manager with a W-2 job depends on a variety of factors. So you want to look through your return and remember, look at your schedule SE, it's towards the bottom of you know the end of your 1040, and look at if you are incurring significant self-employment taxes from your activity as a property manager and real estate broker. This can be significant because uh we got that 15.3% on that first threshold of 135,700. Unlike from your W-2 job, you're responsible for paying for all of that. However, once you pass that threshold, uh you're only gonna have to pay your Medicare tax and it may not be substantial. Um that 3.8% on your Medicare tax passed that threshold. So uh it may not be worth using um electing that S-corp. It really just depends on some variables because if you have a W 2 job, your employer is responsible for paying for half of your payroll taxes, which is the same thing as your self-employment tax. You may also want to consider that C Corp, as we talked about earlier, with that favorable flat tax rate, that may change soon. Another question how would it help instead of just plain LLC where you would have claim expenses? So, right, so as I discussed earlier, there we can treat your taxes differently under the S Corp and the C Corp because of the tax rates of the C and also the S, where we can eliminate some of that payroll taxes. Any set any insight on the change to capital gains rates under the Biden administration? That's a great question, and I'm gonna dive into that into actually my next webinar, which is on how Joe Biden's tax plan will impact you and your taxes. It's scheduled for tomorrow, and I'd love for you to attend. I might be pushing that back, so just hang in there. Uh, I'll definitely gonna be able to um provide you some insight onto that. We also want to consider the fact that Biden is looking to remove the 1031 exchange, which is a very popular method to eliminate or defer your taxes on your real estate investment income. So um that's something else we're gonna talk about in the upcoming webinar. I'm gonna give you some specific numbers and diagrams, just tune in and we're gonna talk about that one. Uh if there are any other questions, you know, feel free to reach out. I'm putting my email in the chat right now, mark at markperlbergcpa.com. Also, I'm gonna put uh my calendarly link. This is for some of you guys. If you would like to schedule an introductory call to see if you are overpaying in your taxes and dive into some more specific areas of the of your return and have me review it and then review it with you. You can schedule a call. Click on that calendar link and set it up for those of you who are watching the recorded version. All this information will be in the comments. Thank you, everybody, for oh, here we got another question. Another problem with the single member LLC, I find is that you have to file that on your personal return. Does the S Corp file its own taxes or is it filed on your personal? That's a good question. It's actually um the with the S-Corp, it's kind of like a little of both, right? So the S-Corp, you file an 1120S return. Now that records what your your your net income is that's within that S-Corp. However, that S Corp that 1120S and the S Corp does not pay taxes, it's still gonna be a flow-through tax liability. So, what you're gonna do is you're gonna your S Corp is going to issue you a K1 just like a partnership, and that K1 will be reported on your 1040, just like a partnership share with, as we were looking at earlier. Okay, guys, so uh I don't see any other questions. I really hope that this helped you out a lot um and and helped you with making sense of your returns. If you want to dive a little deeper, I do a free tax assessment. Um, you feel free to reach out. Hope you all found this valuable and tune into some of my next webinars. I will send it to you and reach out, follow me. Hope this helped, and looking forward to seeing you on the next webinar.