As you gather your 1099s and W2s and reconcile your accounts, don’t overlook these key tax planning strategies that can really make a difference this tax season, writes financial planner Jordan Curnutt.
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The new year is upon us, which means real estate agents are faced with the important task of sorting out financial documents and finalizing their 2023 tax strategy.
While some tax planning opportunities may have been blocked at the end of the last year, a few select strategies are still viable and offer tremendous potential for optimizing your financial health.
As you gather your 1099s and W2s and reconcile your accounts, don’t overlook these key tax planning strategies that can really make a difference this tax season.
Maximize Retirement Plan Contributions
Tax planning involves impactful actions, and few strategies offer as many benefits as maximizing your retirement plan contributions. Choosing which plan to use is not a one-size-fits-all decision but depends on your gross commission income (GCI), fees, and overall cash flow. Depending on these variables, one plan may make more sense than another.
Here are the most important options (from basic to most complex) and their potential tax savings:
No. 1: Traditional IRA
In 2023, the contribution limit is $6,500, with an additional $1,000 “catch-up” contribution required for those over 50. This plan is a good option for agents looking for a straightforward way to save for retirement while reducing their taxable income. It also has the lowest restrictions, making it an ideal choice for new agents.
Second Place: SEP IRA
SEP IRA limits will vary based on your business structure and income level, but they almost always offer higher contribution limits than a traditional IRA. This plan is ideal for sole proprietors who want to save a substantial amount for retirement, thereby significantly reducing their tax bill.
Third place: limited to 401k
For agents operating as an S Corp, the Solo 401k has unique advantages. Its contribution limits are generous, but it requires you to have no employees. This plan is particularly beneficial to those who wish to maximize their retirement savings and minimize their taxes. If the maximum level is reached, a deduction of $66,000 can be generated in 2023.
Fourth: Cash Balance Plan
Cash balance plans are an excellent option for top-earning agents looking for the largest deduction possible. It allows for substantial increases in contributions, making it suitable for those in the top income brackets who aim to accelerate retirement savings and take substantial deductions.
But retirement planning isn’t the only way to contribute to a tax-advantaged account.
Consider setting up a health savings account (HSA)
An HSA is an excellent strategy for those who are enrolled in an HSA-eligible health insurance plan. In 2023, individuals can contribute and deduct up to $3,850 ($7,750 for family plans), plus an additional $1,000 in “catch-up” contributions for those over 55.
HSAs offer a triple tax advantage: tax-free contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. If tax efficiency is your top priority, this will make your HSA the ultimate destination for your funds.
avoid procrastination
A common pitfall for many agents is a breakdown in communication with the CPA, often due to late submissions or incomplete information. The sooner you provide your CPA with all necessary documentation, the more time they have to review your files and thoroughly identify any overlooked deductions. Getting organized early allows your CPA to work efficiently and potentially saves you a lot of money on taxes since tax returns can be rushed.
Forward-looking strategies for 2024
While it’s easy to focus on your immediate tax bill, now is the time to take a longer-term view and start planning for 2024. As a small business owner, you have access to some massive tax planning opportunities, but they must be done in advance. Here are additional tips real estate agents can consider now to maximize tax savings in the future.
Verify your business entity type
Business growth requires re-evaluating your business structure. Unfortunately, changes to entity types cannot be applied retroactively. If an S Corp might benefit you, talk to your CPA to see if you need to take action now to take advantage of the significant advantages for your 2024 taxes.
Verify your retirement account choices
Especially for those concerned about the huge deduction potential of a Solo 401k, coordinating with your payroll is crucial, especially if you are considered an S corporation. This preparation cannot wait until the end of the year, so if 2024 is the year of the Solo 401k makes sense, start the plan now.
Stay informed about tax law changes
Tax laws are written in pencil. This means it’s crucial to stay informed about changes that may impact your business, and a proactive approach can help you take advantage of new deductions and credits.
investment professionals
While tax software has its advantages, the complexities of small business taxes often mean that a CPA can provide valuable advice and potentially discover savings that far outweigh its fees. Plus, it allows you to focus on what you do best: selling real estate.
As your gross commission income (GCI) rises, so will your net income and, in turn, your tax liability. Essentially, the more successful you are as an attorney, the more important effective tax planning becomes. You deserve the highest return for your hard work, and taking advantage of the tax benefits available to small business owners is the key to keeping more commission income in your pocket.
Jordan Curnutt, CFP, is a Certified Financial Planner Professional for those who want to strategically manage their wealth, optimize variable income, build a balanced net worth, and reduce what may be their largest personal expense—taxes. Real estate professionals.Contact Jordan Facebook, Instagram and LinkedIn.
