2021 is just around the corner. With all the magic of the holidays, sometimes it is easy to let things slip that you need to button up before January 1, 2021.
We reached out to Karlton Dennis, one of our select speakers for BEC 2021 and a Licensed Tax Accountant. He is the Youngest Forbes Tax Accountant in the US and fully passionate about the tax codes and leveraging it with Real Estate Investors and Business Owners to provide them the strategies that lowers their taxes legally.
Let’s see what Karlton has to say to give us a heads up on what we need to be looking out for now, before our past catches up to us.
As we approach 2021, we are reminded of the importance of our end-of-year wealth habits and routines to avoid any unexpected tax scares. This year posed many challenges to investors and small business owners, however, there were many winners that managed to expand during a time of economic contraction.
Whether taxpayers earned more income or less, one thing will always remain the same, our taxes will be our biggest burden. So let’s discuss some year-end strategies that can help us position small based business owners and rental investors to pay less taxes in preparation for this upcoming tax season.
Before we go over strategies, let’s address the most overlooked habit and routine, our bookkeeping! Please be sure your bookkeeping has been executed upon, and is in good standing before you discuss tax strategies with your CPA. In order to leverage tax strategies before year end, you will need to have your up-to-date bookkeeping numbers in order to make decisions in real time. Most tax providers provide bookkeeping services that will allow for you to have a basic profit and loss statement and balance sheet to better help your accountant determine your potential tax savings based on potential tax strategies.
Now, for many rental real estate investors, certain strategies can be implemented all the way until the tax return is filed on April 15th. However some strategies, such as establishing an entity structure, may require you to have implemented prior to December 31st.
One strategy that can be leveraged all year long, and even past the tax year is the cost segregation study. You may have heard of depreciation before, but were aware of the ability to accelerate depreciation? A cost segregation is a tax strategy used by savvy real estate investors to accelerate depreciation on a rental property to reduce tax upfront, to allow for additional investing. Sounding good so far?
Implementing a cost segregation study to accelerate depreciation on a rental property has the ability to dramatically reduce a taxpayer’s taxable income, and may even reduce all of their tax liability. Typically this strategy is most effective on residential rental real estate purchased within the last 10 years, and for commercial real estate purchased within the last 15 years. This powerful strategy is one of many ways investors can avoid the taxes associated with their passive income even if they are late on doing their tax planning.
Now, managing your real estate may not seem fun, but it could lead to a massive tax benefit. If you are managing your real estate, you are a business owner. By speaking with a tax strategist, it might make sense to hire yourself, or family members, such as children, as additional employees under your management business. This strategy is a crowd favorite, as many taxpayers are looking for ways to leverage their investments while involving their children early. Make sure to speak with your strategist on how to leverage this strategy under the correct entity structure so you may avoid any additional tax that could arise from hiring your children.
And Last, but surely not least, is the charitable contributions. As a part of the Cares Act initiative of 2020, eligible taxpayers in 2020 are able to deduct 100% of their charitable contributions on the individual tax returns for the year 2020. So, if you were planning to be philanthropic this year, understand that the sky’s the limit on your charitable contributions for a deduction in 2020. This has been an unpredictable year to say the least, so be sure to consult with your tax strategist on any potential changes as you lead up to filing your tax return.
Good luck Tax Savers!
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