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Investors Beware: 8 Warning Signs You May be Overpaying Your Taxes

by Amanda Han on March 20, 2014 · 9 comments

  
Are you overpaying on your taxes?

Hi, everyone!

My partner and I speak often at local REIAs and other venues to educate investors on tax saving strategies. After we do our teaching sessions, I often get to meet people and learn about their investing experience and their tax related questions. What I learned is that a lot of people wonder whether or not they are overpaying in their taxes or if there is something they should be doing differently to save more taxes.

To be honest, it is very hard, if not impossible, for me to give an in-depth diagnosis and develop tax strategies for someone I just met a few minutes ago. Tax planning is a process that includes reviewing old returns and more importantly understanding the financial profile of an investor, their business, family dynamics, and investment goals.

Although I generally cannot tell someone I just met whether or no they are paying too much taxes, I have identified a few warning signs that may indicate where opportunities may exist.

Related: 6 Reasons You Should Consider Filing an Extension for Your 2013 Taxes (Score One for Procrastinators!)

8 Warning Signs You May be Overpaying Your Taxes

1. Record keeping

Bad Sign: No stable record keeping system in place. Words to live by are “What gets measured gets managed.” It is super important to know how your real estate business is operating each month. If you track your expenses, you can easily see where legitimate tax deductions can be taken advantage of. Accurate and timely financial records keep your cash flow in the green which is essential to your wealth building. It is also the very foundation of effective tax planning. If you don’t have good bookkeeping in place, you may be losing out on some legitimate tax write-offs.

2. Communication

Bad Sign: Plan on paying higher taxes if you are not meeting or communicating with your tax advisor throughout the year. Any of us who plan on reducing our taxes need to consider proactive planning year-round. If you are waiting until April 15th to think about reducing your taxes, you may be in for a big surprise. Frequent communication with your tax advisor provides you with tax planning opportunities. Maximizing your tax deductions is done throughout the year with effective tax planning.  Be sure to make this a part of your business and real estate operational system

3. Knowledge

Bad Sign: Each year you explain your real estate transactions to your tax preparer because they don’t recall or understand what exactly it is that you do.  Real estate is a specialized area and there are specific strategies that can significantly benefit you as an investor. Real estate related tax strategies may be very different from tax strategies for restaurant owners. Make sure your tax advisor is well versed in the tax saving opportunities in your industry.

4. Compensation

Bad Sign: Not planning on how to extract money from your business tax efficiently. There are many ways to extract profits out of your business so let’s look at the good and the bad. For C Corporations, you can save thousands of dollars a year in taxes by simply paying yourself a higher salary. For S Corporations you can save thousands by doing the opposite and paying yourself the least amount possible. There are other great ways to extract profits from your business “Tax Free.” If you haven’t planned on “how” to extract those profits, you can easily be overpaying in taxes.

5. Retirement Planning

Bad Sign: You are not currently taking advantage of tax deferred and/or tax free opportunities of retirement planning. Ask yourself: Am I significantly reducing my taxes using retirement vehicles? You will be surprised at the many different types of retirement accounts available to business owners and real estate investors. Not only do retirement accounts help you plan for when you retire but they also help you to reduce your current tax liability at the same time. If you pay taxes to the IRS and are not using retirement accounts you are more than likely overpaying in taxes.

6. Fringe Benefits

Bad Sign: Never having heard of the term “fringe benefits.” Tons of tax-free fringe benefits are available where your business takes a tax deduction for perks they provide to you as the business owner (and it’s not taxable to you). There are dozens of these amazing techniques including company cars, gifts, and Medical Savings Account to name a few. If you do not take advantage of tax free fringe benefits as part of your business planning, you may be overpaying your taxes.

7. Personal and Business Deductions

Bad Sign: Questioning what items you can shift legally from your personal expense bucket into legitimate business deductions. Nowadays, it has become almost impossible for us to distinguish between personal vs. business items. Many of us use our personal cellphone, cars, iPads and laptops for business. All of these personal items that you use day in and day out for your business may be legitimate tax deductions if tracked correctly. If you don’t know how to shift personal items into business deductions, you may be overpaying your taxes.

 8. Tax Savings Plan

Bad Sign: No tax savings plan in place to make sure you are protected from the IRS. While incorporating all of these strategies above, you should be asking yourself is “What is my tax savings plan?” If you don’t know the answer, then it may be safe to say you probably don’t have one. No overall plan on “how” you will save taxes is one of the most common mistakes costing Americans to overpay taxes year after year.

What do you think? Is there a chance you’re overpaying your taxes?

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{ 9 comments… read them below or add one }

Mehran Kamari March 23, 2014 at 9:57 am

I just completed my first year as a real estate investor in 2013. After having done my taxes, this article is GOLDEN :) I had fairly good bookkeeping and it made everything much easier. I want to shift over to Quickbooks instead of using folders on my computer and a bunch of spreadsheets though!

As I start to transition from my W-2 job to being a full time real estate investor, I will be taking a big look at numbers 4, 6, and 7 for sure!

Thanks Amanda!

Reply

Amanda Han March 24, 2014 at 5:13 pm

Glad to hear that Mehran!

Reply

luke March 23, 2014 at 2:36 pm

Like your post. I’m looking for a good tax advisor. How dowe find one of those?

Thanks,
Luke,

Reply

Amanda Han March 24, 2014 at 5:15 pm

Hi Luke:

The best thing to do is to ask your fellow investors. BP of course is a great place for referrals. Look for testimonials if they are available since what others say is a great indication of what type of service you will receive. Aside from that I wrote another blog recently that you may find helpful: http://www.biggerpockets.com/renewsblog/2014/03/13/finding-right-tax-advisor-real-estate/

Reply

Donna March 23, 2014 at 9:36 pm

Yes, I would like to know how to find a good tax advisor/accountant who understands RE Investing…How do I pre- screen one?

Reply

Amanda Han March 24, 2014 at 5:16 pm

Hi Donna:

See my comment above for Luke on additional resources. Finding out if they understand real estate is key. Do they have published resources for you on real estate related strategies? do they have other investor clients that you know who can tell you about their service and expertise? Your investor network is the best place to start!

Reply

Shaun March 28, 2014 at 2:13 pm

Nice list of some good rules of thumb.
I have recently out grown my accountant.
He did very well for me for many years but when my activities shifted out of what he was really at I should have seen issue #3 as I was telling him what I had been reading and basically prompting him to look up stuff.
Not hard to see why he missed stuff!

Reply

clay April 3, 2014 at 8:57 pm

Oh my God .. I was all the way, 100%, #3 until 2 years ago. My cpa played the guessing game with me. You have no clue! So glad I’m more straightened out now. All I know is I was doing deals as quick as I could think and had my Financials strode from GA to LA my God.

Reply

Ed Castellanos July 13, 2014 at 1:13 pm

Very true

Reply

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