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.
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.
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
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.
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?