Oh, it’s that time of year. Most of us real estate agents dread well, really everybody dreads, but especially if you are a 10 99 person, which real estate, most real estate agents are, where you’re not getting your standard W2 anymore, like an employee, right? So we have to gather all those pesky documents, including receipts, and making sure our books are done because Tax time is right around the corner, and tax time for us real estate agents can be really scary. And it used to be scary for me to until I met the Tax Lady, who completely changed the way that I look at my business, my finances, and especially look at tax time.
Linda Del Marler is founder of Tax masters,’ and she’s been helping real estate agents do their taxes for over 40 years. Now, she really understands the intricacies of doing taxes as a real estate agent, because she used to be the one before she was an accountant. In fact, that’s what made her want to be a CPA, was having to go through the pain and watching everybody else in her office go through the pain of doing their taxes as a real estate agent. And so whether you’re a veteran agent or you’re just starting out, you may be cringing right now, thinking about this as a podcast that we have to listen to about Taxes, but don’t worry.
Linda somehow makes talking about Taxes fun because she finds ways legal ways for us to keep more of our hard earned commissions in our pockets. Plus, She put together this guide for the agent Grad School community called the real estate agent’s guide to taxes, and it will make sure that you are getting every deduction That you can, and that’s something you definitely don’t want to miss. So stay tuned till the very end, and we’ll show you how to get that. And now I’m so honored and pleased to welcome Linda to the show. Welcome. Linda
Thank you for inviting me. Jennifer.
Yeah. I’m so excited. Thank you for your time. I’m so excited to have this conversation with you today because Tax time is really scary for us real estate agents. I know you specialize in helping real estate agents with their taxes. So, you know, you’re used to us having high anxiety this time of year, as we get our prepared for our tasks. Now, what do you think? I think most real estate agents, the reason that they are so nervous about taxes is because most of us come from a W2 background. We worked for a company they give us a W2. We usually get a refund at the end of the year, and all of a sudden, we’re real estate agents, and we don’t get any taxes taken out.
We get thrown this 10 99 form we have no idea what to do with. Where do you think real estate agents need to start when it comes to thinking about their taxes and how to make sure that they’re paying their taxes on time. And they’re not hit with some big tax bill. Can you tell us just where real estate agents should start with that?
Okay. It’s really easy. The first thing they should need to do is to find a new accountant who specializes in self-employed people, but even particularly realtors. And my firm, we have about 3000 realtor clients. So, of course, we’d be a good place to start, but anybody who’s familiar with self-employed people, especially self-employed people who are entitled to claim office at home expense and car expenses, because that’s realtors two biggest deductions. And once you have a good accountant, the accountant will guide you as to what you can deduct and when you have to pay. And I’m glad that you mentioned the problem about paying penalties and interests because they are almost confiscatory here in the state of Maryland.
We pay a 23% penalty and interest to the state of Maryland if you ended up owing more than $500 when you file a return and the government charges a 6% penalty and 6% interest also, and many of the States like Washington and Virginia also charge 20 to 25% penalty and interest. So you’re not just paying tax if you don’t have a good accountant, then if you don’t pay your taxes on time, then you’re going to pay the penalty and interest, which are not deductible.
So you mentioned self-employed individuals. I don’t think most real estate agents consider themselves self-employed individuals. Can you talk a little bit about why it’s so important for real estate agents to see themselves that way, and maybe talk a little bit about the benefits of seeing themselves that way?
Oh yes. If you have a choice of being self-employed or employed, I always tell people that go for self-employed because you are entitled to more deductions actually, as an employed person, you are not entitled to hardly any deductions at all, but as a self-employed person, now you have become just like general motors or Oracle corporation. You’ve just become a big company, except that you were a little company and you are your own boss, but this means that anything that you spend money on that helps you make more money, that’s probably a legitimate tax deduction. Now it has to be ordinary and necessary. So if you buy it at $10,000 oriental carpet for your home office, then you’d better be in a very high tax bracket in order to deduct it.
That doesn’t mean you’ll have to go and get a $50 rug from Ikea, but it has, you know, something for your home office would be deductible because it’s going to help you make more money, even if you don’t see clients there. So as a self-employed person, almost everything you spend money on that’s going to help you make more money becomes a deduction. And it’s really important to know what these are. We’ll talk about them in the next few minutes of course.
Yeah. But why don’t we talk about the mouse since you brought him up.
I think that all, all day long, the first deduction that’s most overlooked or one of the most overlooked is claiming an office in your home. Since 1999 congress has allowed office at home. As long as you can say that you have two things for your office, that you use it regularly and exclusively. So if you have any space in your home, whether you own your home, whether you rent your home, whether it’s part of a room or a whole room, it doesn’t matter. It’s a space that you use regularly and exclusively. Now we’ve found in our 3000 clients that are realtors, the average realtor uses between six and 12% of their home as their office space.
So this deduction averages about $3,000, and the $3,000 deduction is huge because you usually pay about 22 to 25 or even more percent in federal tax. Most States, what are 43 of them at least, do have a state income tax of 6 to 8%. And your social security and Medicare tax is another 15%. So let’s just say that’s 43%. So if you have a deduction of $3,000 for your home office, you just saved almost $1,400 in income tax, just for that one deduction and also your car and things like that.
Now there’s tons of deductions, and it can be anything that you spend money on. I have a lady who’s a realtor, and she is also a gourmet cook. And once a month before the COVID hit, she used to invite her clients and refer people to her house. And she would cook wonderful meals for them. So we would deduct her cookbooks because she needed those to produce these wonderful meals. And of course, we’d do the food and the booze also. So these are things that are deductible, which you need your accountant to sort of guide you along the way. I think on your website, you are going to offer a list of some of these deductions. Are you Jennifer?
Yeah. You created what we’re calling the tax preparation guide for real estate agents. So anybody listening can go to AgentGradSchool.com/taxprep and get that, and also find out more about how they can find you, Linda. So let’s, if you want to have that list of deductions, go ahead to AgentGradSchool.com/taxprep, and you can get it as a free download, but for those listening, Linda, are there any other business deductions that you see real estate agents myths a lot when you start working with them?
Oh yes. The most overlooked deduction in the whole tax code, and you know, there are 74,000 pages plus all the new stuff that they have. The most overlooked deduction is being as the ability to deduct your medical bills as a business expense.
Now, this only happens if you’re self-employed. So people who work at companies, they, of course, usually get some kind of health insurance, if they’re lucky enough to have a good employer, but when you’re self-employed, who is your boss, you are. So if you would like to be able to deduct your medical bills as a business expense, and why is this important, Jennifer, it’s important because in order to deduct your medical bills as a personal expense, do they have to exceed seven and a half percent of your income?
So let’s say we have a married couple and their adjusted gross income. That’s all of their income on the front page of their tax return is a hundred thousand dollars. Save 50 husband, 50 wife, okay. That $7,500 is seven and a half percent of their income.
So if they have $8,000 in medical bills, there are only allowed to deduct $500, which is nothing. And it only saves them federal and state taxes. Now, if you’re in a business and you hire your spouse, or we make you a corporation, we can deduct the whole $8,000 as a business expense, which saves you probably somewhere around $2,500 and income tax, which is like $200 a month, tax savings.
And it’s fully deductible because you are self-employed. This is a huge difference. Now I’ve been doing these self-employed retirement plans for 35 years for our clients. We set up more of them than anybody in the United States of America. Actually, Marty Wapner in my office is the one who sets them up. And this way, people can take advantage of deducting all of their health insurance, all of their dental bills, all of their glasses, any medical bills they’d pay for themselves and their family. It’s a huge deduction, and like I say, it’s only available if you’re self-employed and it’s only available. If you have a good accountant, he knows how to set up the plan.
And it’s been around for 55 years. So it’s not a new deduction. You’d be amazed at how many times we get a realtor who’s been in business 10 or 15 years to come to see us for the first time.
And they say, well, my accountant never told me about it. So it must be a new law. And I say, well, that was new in 1955 when it was passed.
Exactly. What are some other things that you see when real estate agents start coming to you? What else do you tend to feel that they haven’t done already? For example, you mentioned a kind of corporation. Is that one of the things? Can we talk more about that?
Yes. I teach a class on entities. Now when you first start out, I would highly recommend that everybody become what’s called an LLC limited liability company now in Maryland, 300 a year. I think out in California, it’s over 800 per year. So in some States, it’s very high to be an LLC. In other States, it’s only $50 a year. Now in an LLC is not a corporation. It stands for a limited liability company. But the benefit of having a limited liability company after your name is that you’ve just built a brick wall around your business. So God forbid, if you do something and you get sued, and you know, we live in a very litigious society these days that your chances of being sued are enormous.
When you are in any kind of a business, at least you’ve got the protection of an LLC, which is basically, as far as I know, the same protection as a corporation, at least around here. My daughter’s a lawyer.
She says, don’t give advice, mom, when you are talking. But anyway, LLCs are important when you’re first starting out because when you’re first starting out, you know your chance of making an error is great because you don’t have a lot of experience. And then a lot of people say, well, now I’m experienced. I’m 10 years. I’m a veteran. And so I won’t make mistakes. But now that you are a veteran and you’re having a lot of transactions, your exposure is greater because you are talking to more people and your chance of being sued is also great.
So whether you’re starting out or whether you’re a veteran realtor, either way, I really like LLCs. Now in the LLC, It’s really just for protection only. It saves you no tax whatsoever. The only thing is that you do get to deduct a fee that you pay to form the LLC with the lawyer and then the annual fee you pay to keep your LLC or to keep your name registered. However, if you want to save taxes, and then we go to a subchapter S-corporation or a C Corp, and there are vast tax savings available, depending on how much income now you are. Usually, this is when people are grossing more than a hundred, $120,000 that we advise them to do these things.
And of course, if you’re single and you want to deduct all of your medical bills, then, of course, you do have to become a C corporation. But if you’re married and you have a spouse, then you don’t have to become a C corporation to deduct medical bills. Now I’m getting more complicated than I need to get to, but I just want you to be aware of that. All of these things are important for protection purposes. Now, many times you’ll go to an accountant who says, Oh, you need to be a corporation immediately. And they’ll have you set up a corporation, and then you have to pay yourself a salary. And the accountant gets the charge you an awful, a lot of money because they have to do the bookkeeping.
They charge you for your own return, and the corporate return and the salaries, the payroll, and they make a lot of money, and you end up spending more money than you need. So a lot of times when we get a new client or somebody who’s making less than, let’s say 120,000, the first thing we do is we dissolve their corporation, and they say, Whoa, why are you getting rid of my corporation? I said, well, it’s to save you money because you don’t need it. All you need to do is be an LLC. And it’s going to save you a thousand dollars a year or so. If you go to an ethical person who knows what they’re doing and has experience with realtors, then they will tell you for sure, whether you need to form a corporation for tax purposes or not, but be very careful if someone who you are walking in the door and there are going to do all these things for you, which just makes them money.
It’s not ethical. And I really get upset with accountants, who do things like that.
At what income point do you recommend your client, your realtor clients for them, the S corp? When does that make sense?
Okay. Makes sense. Number one, if they are single and they want to avoid paying social security tax, now what happens is on your net income that you earn from your 10 99. In other words, you take your gross income, which is all your commissions subtract. Every bloody business deduction you can think of what’s leftover is going to be subjected to 15.3% tax that’s on the first $200,000 that you are in gross. So 15% is a lot. If you net five or $50,000, let’s say you make 80,000 and you net 50,000 on that at 50,000, you are going to pay $7,500 just to the social security administration, period. Okay?
That’s a lot of money. That’s $600 a month. You’re paying this, also security plus you’re going to pay federal and probably state tax is also so the social security tax is really high. It goes on until your gross income is about 200,000 or more. So in order to avoid that, we try to get people to become an S Corp, because then what happens is the S-corporation paste or the owner of the corporation, a small salary, whatever is justified.
And then the rest they receive as dividends or bonus, and it’s not subjected to social security tax. So this is a little complicated.
You don’t want to do it on your own. Do not go to legal zoom and form your own corporation. I was giving a lecture for our local real estate board in the lecture was a lady who was formerly a lawyer, who’d become a realtor, and she became to be my client. And she brought me at the papers she’d formed off the internet and inside of her LLC, then things that are in a corporation, she’d had a DRO, that’s a debt restitution order, which just meant that if the corporation couldn’t pay something, she would pay it personally.
I said you realize that this phrase in this formation negates all the work that you did. She says, you know, I was a communications lawyer, so I don’t really know what I was doing. So don’t do your own legal work and don’t do your own tax work.
Especially as a real estate agent, especially as a self-employed person. But what I heard you say is have an LLC almost right away. And maybe don’t worry about becoming an S Corp or C Corp until you’re at 200,000 and above. Is that accurate?
Or even a 120,000 a lot. It depends on whether we have someone who is doing a lot of advertising and a lot of expenses. If you’re netting $80,000 or more after all your expenses, then I’d like to talk to you about having an S corporation, perhaps to net a 180,000. You’d have to be taking in at least a 120, maybe a 130. That’s a good cutoff right there. And then it gets kind of serious because the social security tax, like I say, it’s confiscatory, it’s so high.
But that’s great. That’s helpful for people. How do you recommend your clients and us real estate agents who are running around all the time. We don’t even like, how do we stay organized all year long?
So when it comes to tax time, right now, we’re, we’re recording this in February. We’re starting to think about our taxes in our tax bills, you know, April 15th. What do you recommend every real estate agent be doing right now to prepare, but also all year long? So it’s not so painful this time of year.
Yeah. They have to have options. You can have a good bookkeeper. I think we charge 300 a quarter, maybe 350, a quarter. To keep track of somebody’s accounts. We have them give us access to their checking account, just to look at it. And also their credit card accounts.
And then Amanda or somebody in my office goes through it and gives them a quarterly report. And she’s really good. She likes to deduct everything. Don’t tell her, she deducted one of my massages last year as a business.
We need that.
And then I did get the masseuse as a client. So maybe that’s okay. Yeah. I used to do that to everything. But anyway, if you have someone who is a bookkeeper who is doing that for you, that’s super; if not, and you’re just starting out, then I really recommend looking at it because you need to know what is deductible and the other way to know what to Keep. So that list that you are going to give access to it with the realtor deductions. I believe that’s also gonna have their car deductions. And by the way, your car is your biggest deduction for any realtor. And if you’re not claiming a lot of car deductions, then shame on you. And we’ll talk about our deductions versus office at home because that’s important to me or to make a note of that.
So the car deductions are huge, and also your in case you have a travel or business expense. Can I tell you about something new?
They loosened up the deduction for business meals. Now last year, what happened was, is they said you’re not allowed to deduct any entertaining expense. So if you take a client to the Kennedy center or to the theater, or to a sports event, we can’t deduct the tickets. But if you have any business meals while you’re at the event, or let’s just say, you’re showing property, and you and your clients stop at Panera’s and have a salad, of course, the salesman always pays. So that means that the realtor picks up the bill that is deductible because it’s a business meal, but in the past, for the past many, many years, you’ve only been able to conduct half of them. Well, good news.
I’m clapping. Now you have a hundred percent of business meals starting this year. And the reason for that is because Congress wants to help the restaurants.
Wasn’t that nice, really? So now, if you take your client to Panera’s or, or to a steak house, or anywhere you want, you to deduct a hundred percent of the whole meal instead of 50%.
Wow, that’s amazing. Are there any other new deductions?
Well, there are some that don’t affect realtors. It’s for elderly people that are over 72, and we can go into that one. Sometimes if you liked the RMD has been lessened, nothing else dramatic, except that I did want to mention that if you claim an office, your home, you automatically get to claim more automobile expense.
And here’s how it works. You know, during tax season, a lot of times I do a lot of radio shows. I live in Bethesda, Maryland. I go down to the Sirius XM radio, which is located down in DC. That actually is in Southeast DC. So what I do is on Saturday morning, I get up, and I drive to the Southeast.
Do you see, I do the show, and I come home. Well because I have an office in my home, I can deduct my driving from my home to Sirius XM studio. But if I didn’t claim an office in my home, then I cannot deduct my first trip of the day because that’s considered commuting. In other words, if I want it, if I want it to deduct the trip to the studio, I would have to leave my house in Bethesda, drive to my Rockville office, where we have three offices there, and then drive from one of those offices down to two Washington.
So those folks who claim an office in their home not only get to claim the office in the home, but they get much, much more car expense because they actually have no more commuting anytime they leave.
Even if you go to the dentist, you know, I go to the dentist, and of course, he’s my client. So I’m sitting there even with things in my mouth, talking about Texas, I can do that in my trips to the dentist. Everything is not the cost of the dentist, of course. But in any case, you have a, yeah. That’s another reason you want to claim office at home. Now, many people don’t claim office at home. I’m sure there are people listening who have been in real estate for a long time. And they heard the old rule about the office at home; it would get you audited. Well before 1999, when they changed the rules, it could get you audited. But since 1999, do you remember what those magic words are?
Regular and exclusive. That’s all it takes because, before 1999, that had to be that you have a separate room that didn’t have a separate entrance or it was a separate building. And when you sold your house, you had to pay tax on the gain. None of that happens now. So when you sell your house, even if you’ve claimed office at home, there is no tax on the gain of the house. It doesn’t have to have a separate entrance. It doesn’t have to have a separate door, and it doesn’t have to be a separate building. All it has to be is what regular and the exclusive that’s all it takes. So I guess I’ve, I’ve beat that horse enough.
Well, one reason I love talking to you about taxes is because, A, you seem to know things that nobody else knows, like all the little secrets, sneaky stuff, B, you make it really fun. But see, one thing that you taught me is to get excited about expensive because of their deductions. And I think so many real estate agents, at least that I come in contact with. I kind of, they’re kind of nervous about spending money. They don’t understand that it’s an investment in their company.
And what you taught me was that expensives for our business actually help our income cause we can use them for deductions. So you leave me excited about spending money in my business. Thank you for that.
You know, it’s true because a lot of people that are, there are loads to spend money on, on propaganda, advertising, whatever you want to call it. And I tell them you’re tax bracket. By the time we pay the 50% that you know, their social security, Medicare tax, and then six to 8% state tax and the federal tax, you’re just going to save at least 40%. So let’s say you were thinking of spending $300 on a newsletter or, or some pictures or something.
Well, that $300 is going to save you $120 in income tax. So it really only cost you $180 and not 300. So then you feel better about spending the money. And when I say this at offices, when I used to do things in person before the pandemic, the office manager will say, yes, yes, spend more money on advertising because you get it back.
And every deduction, if you just think that every deduction is probably going to save you a minimum of 30%, if not 40%. And if you’ve been in real estate a long time, and by the way, I’m a real estate broker. I do not do real estate. I haven’t done any real estate in 35 years, other than to refer someone, to get help from a realtor who actually works, but I’ve kept my license all these years. That’s how I started out specializing in realtors because I was, I am a realtor myself. I’m a member of the local Maryland society, of course, but realtors, I was paying too much in tax. And I took the H and R block courses as many years ago, right out of college.
And as soon as I learned about deductions, I said, Whoa, everybody in my office needs my help. I’m going to stop being a realtor. And I’m going to start doing the taxes for all my realtor friends. And that’s where my little company got started. That was 40 years ago now.
I love that. I love that story because one thing that I teach here at, even in agent grad school, is having a niche and how that niche can help you get even more clients and how to pick a niche is based on your personal experience.
So you became go ahead.
Yeah. And it’s fun. It’s fun because I know what they go through. I know how hard they work and how much time they really have, you know, you have an office in your office, office in your home, and office in your car. So, you know I know all these things. I remember carrying around toilet paper and the trunk of my car because you go to an empty house or an empty building. I did commercial real estate more than residential back then. And I wore a short skirt. So I sold a lot of buildings. Yeah. In fact, then it was really easy. Nobody asked you about any credential’s you just showed up and looked pretty, and people bought things from you.
I was very lucky, but that’s how I made enough money to start.
My company was by doing real estate. But the deductions are really, really important. And there are so many of them, you know, there’s one, there is a deduction that you’re allowed to take for giving gifts to clients. Now it’s limited. There is another bad one. It’s limited to $25 per person per year. So if you sell a nice house to somebody or somebody sends you a referral, and you’d like to do something nice for them, you can do anything that you want. You can give them a hundred dollars gift certificate if I have a hundred dollars gift certificate, but whatever you do, it’s limited. As far as the deduction purposes to twenty-five dollars per person per year per a married couple.
Now the way to get around that is a little, a little more complicated.
Actually, not if you give the client something that’s connected with the sale, let’s say that you’re out showing a house, Jennifer, and you go to the inspection, and Oh my gosh, the dishwashers are broken. And the people aren’t going to go to the settlement until this dishwasher gets fixed. And everybody’s arguing about it, so who, just think about it. Who, out of the kindness of their heart, offers to pay for the bloody dishwasher. Yes. Okay. And that becomes a way that’s like a gift, but it’s really not a gift. It’s called a client accommodation. Or if you tell this client, if you buy this house from me, I will give you a warranty.
Warranties are about $500 around here, or sometimes a little more, a little less. So if you throw in a warranty with a sale, that’s what a gift. That’s a part of the client’s sale at a client accommodation. So we can do about that. And of course, at $500, did it cost you a 500? No, it saved you about $200 tax. So it only costs you $300, and maybe you’ve made a three or $10,000. Commission because of being nice to your client. So all of these things, you’re making an investment in your future and Goodwill with your clients. There’s another super deduction. Ooh. Would you like me to tell you about that?
The holler rule. Oh, this is my favorite. Okay. If you have an expense, you can deduct it without any receipt, without any proof. As long as it costs $75 or less, let’s say that Jennifer, on a Sunday morning, she’s driving up to show a house. And as she’s driving to the house, she remembers, Ooh, this house is vacant. What do I need to take with me? And of course, you want to take something. That’s going to make the house smell nice and fresh. And then you’re also going to want to take toilet papers and maybe some Windex for the windows and the front door. So it looks tidy.
So then you stop at the grocery store, and Jennifer is not just going to buy for showing the house. You are going to buy a whole bunch of stuff for your home. So now you’ll leave the grocery store, and you’ve got this long receipt, and you don’t want to have to take the receipt and circle. Okay? Here’s the bottle of water that I bought. And here’s the Febreeze. And here’s the toilet paper. No, no, no, You just write down somewhere on your iPad or your iPhone or whatever telephone you have or a piece of paper, anything you just write down $60 showing the house and the date. Okay, that’s all you need. You don’t have to have the receipt. You then throw it out. Now you get to this nice how’s that you are trying to sell.
You are going to hold it open. And oh my gosh, the yard is a mess. And maybe that needs to be the lawn needs to be mowed, or the snow needs to be shoveled. So you get the teenage boy next door to come over, and you’re given the 60 bucks, and he cleans up the yard and fixes up the garage and things like that. Does he have a receipt to give you? No, he doesn’t. So you just write down a kid next door, open house expense, $60. And of course, the date now, at the end of the day, you’ve got two $60 of expenses, which are both under $75. You add them up, and you can put them on your tax return. Okay, well, that’s good savings because that’s $120, and it just saved you $48 in income taxes.
So all of these little things, now, people often forget how much they spend on getting their car washed. Or I have one lady who tells me she gives the boy next door, 70 bucks a week just to wash her car and detail it and keep it clean. She has a very nice car. So 70 bucks a week, times 52 weeks, we deducted, and she doesn’t need any receipts. Now, of course, a little boy is supposed to be paying taxes on that, but that’s not my problem. And this is $75 rule as one that people don’t remember at all. We had a lady in our office, and this is the last summer before everything got really bad. And we were telling her about it. I think it was Andre’s in the office.
He was telling her about the $75 rule. And she said, would you mind if I came back tomorrow? Because when I filled out this form for you, I didn’t know about the $75 rule. And I’m going to go back and fill in some more numbers. So She and she made about $80,000. So she came back as soon as she left and came back the next day with all of the new numbers for us.
So here’s the takeaway is real estate agents. So often don’t spend money. You should spend money on your business so you can have deductions and keep more of your income. That’s the way I look out of it. That’s the way I looked at it. And you taught me that it changed my life because I used to be really, really cheap when it came to my business. And when you taught me that I should be excited about deductions, finding ways to spend money, to invest in my business with the little things I know every time I write a check or make any type of charge to my business. I like it makes me happy, instead of feeling depressed that I had to pay money. It makes me happy because I’m like, it didn’t cost me a hundred dollars; it only costs me $70, and it helps my tax situation.
That’s right. And I was telling my clients to not scrimp on, on their technology equipment. Now you have the best telephone, the most up-to-date telephone, whether it’s an iPhone or Samsung or whatever it is, and also a good computer and, and, and all of the programs that you need.
And of course, don’t scrimp on education and never scrimp on your accountant. You know, there’s a saying, which is really true. If you think a professional is expensive, try an amateur, because many times we’ll have someone who has gone to one of the large national firms or something, and they bring us the return that they’d done, or they bring us something that they’ve prepared on turbo tax.
And, Oh my gosh, the first thing I do is, or whoever is in the office, we do, we take a red pen and we sit down and start circling all the empty spaces that are missing all the deductions and all of the deductions that are on the wrong lines. Because if you put something on the wrong line, it can get you audited.
I had one gentleman who had done his own taxes, and he couldn’t figure out why he got audited. And I said it’s really simple. You put your advertising expense on the wrong line. And they went nuts. And he said, do you mean if I had put it on a proper line, I wouldn’t have been on it. And I said that’s right. I said, but don’t worry. I’m charging you a thousand dollars for the audit, but I’m going to get you a $5,000 refund because you didn’t deduct half the things, right?
So after expenses are exhausted, and hopefully, every agent listening is excited to spend money, keeping track of those deductions. What other steps can us real estate agents take in order to mitigate, mitigate, mitigate our tax expense?
Okay. Jennifer the most important thing that everybody who self-employed needs to do is to please, please, please spend $160 a year. You can spend more, but the one that I use, I don’t sell these plans, but the one that I use, it’s a 160. And I think it’s the best is to open up a solo 401K plan. Now what’s a solo 401k plan? It’s very easy. When people work at offices, there’s usually a 401k plan and you have your boss take out some of your money in paycheck, out of each paycheck, and they put it aside, and it goes into your own retirement account. Okay, well, now you’re your own boss. Who’s going to take care of your retirement?
Well, don’t count on social security. The average social security check is peanuts. It will be enough probably to pay your medical bills each month, and we’ll have nothing left to live on. So you need to provide for your retirement. And as soon as you start making any kind of money at all, you need to put money into your solo 401k. And like I say, it’s only a 160 a year, which is deductible. You can deduct that 160 or so. It’s not like it’s expensive. Now what happens is each dollar that you put into the solo 401k, not only do you get to deduct it, but you also still have access to it. It’s not like an IRA or a SEP IRA where you’re not allowed to touch them.
A solo 401k is three times better than an IRA or a SEP IRA. And the way it’s three times a better is, number one, it’s 100% protected from lawsuits, creditors, and bankruptcy. Nobody can take that away from you unless you get a divorce or you don’t pay your taxes. Anyway, the solo 401k, I’m going to repeat that one. Cause it’s so important. Its 100% protected from lawsuits, creditors in bankruptcy. The second reason you want one is because you can borrow from it at any time at any time, for any reason. So if you put in $5,000 Today and you need the 5,000 tomorrow, you’ll have access to it.
Now you can’t take it all out. They let you take out half of what you put in or a half of what your balance is. The third reason is you can put more money into a solo 401k. So those of you who are in a big tax bracket and you want to reduce, it is very simple. You can put in 20% of your net earnings from real estate and you can also put in an extra $19,500. So somebody who makes $30,000, they could put in $6,000 because that’s 20% of the 30 net. And they could also put in 19,500 that’s 25,500. So if you were in a 30,000 and you didn’t want to pay taxes on it and you can afford to, this would probably be somebody who has a spouse who’s making good income.
You could put 25,500 out of the 30. And if the person happens to be overage 50, they can put the whole 30 into their retirement account and if they need it, they have access to it the next day. So there is no downside to a solo 401k. And of course during the COVID crisis last year, they allowed loans of up to a hundred thousand. And then of course, when you take the money out, as you are taking it out as a loan, so you do pay yourself 5% interest, but that’s been the same law for the last 20 years. And by the way, their solo 401k is not a new law. It’s been around since 2001. So if you have an accountant, never told you about the solo 401k and has been lending, you contribute to a stupid IRA or a stupid SEP then shame on them because they haven’t kept up with a law.
If you have an investment advisor where you have your IRA or your SEP, and they didn’t tell you that you could have had your money in a fully qualified account, doesn’t qualified sound better than unqualified. Yes. Okay. Well, the solo 401k is the only qualified account. So you don’t want an unqualified IRA or unqualified SEP. I go nuts about these. This is one of my favorite things to talk about.
We’ll save so much money in Taxes like dollar for dollar.
Fully, fully deductible at the state and federal.
Yes. That is one of my favorite things too. These are all things that you saved me.
So tens of probably hundreds of thousands of dollars over the years, because when I came to you, I didn’t have any of this stuff. Nobody told me. And that’s why we’re doing this Podcast so that people can know that this stuff is out here, not figure it out on their own and find, you know, Linda who does Taxes for all 50 States. And you even have clients who are us citizens that are abroad that you go visit. So you’re all over the place.
30 countries. And many of them are self-employed. We have realtors is in Dubai and Singapore all over the place. We get a one realtor sends another, sends another. That’s how we ended up with so many of them. Thank God.
Thanks. Yeah. Well thank God for you guys.
I forgot to mention the QB ID, which is a new 20% deduction that just started a couple of years ago, and QB ID stands for qualified business income deduction. I just want them to be aware that anybody who shows a profit from a schedule C, which is your self-employment income, is entitled to this. Also, you can get it if you’re a subchapter S-corporation and the 20% deduction is just what it sounds like, it’s 20% of your net income. So let’s say somebody made 80,000, they had 30,000 in expenses. Their net income was $50,000. Well, 20% of 50,000, it’s a $10,000 deduction. Now this is a new, a new law and a new form and a new everything.
So if you have an accountant who is not keeping up with things, Oh my gosh, wouldn’t it be a shame that you missed out on a $10,000 deduction because that I’ve seen it happen. I’ve seen it happen with a new clients. Who’ve come in to our office in the past two years. They didn’t have anything on that line. I don’t know why the line was empty because it meant that the accountant was just really stupid. And don’t forget, you don’t forget your QBI D deduction also but this is up to your accountant to know for you.
Well thank you for adding that. And as we come to a close, I want, if it’s okay with you, what I’d like to do is most of the Agents listening kind of fall into one of three categories. Either their brand new never sold a house, desperately trying to figure out how to get clients and become successful. That’s kind of section one. The second bucket of Agents listening tend to be just getting into that kind of a six figure ish, maybe 80, 90, a hundred thousand dollars and are in a lot of pain, meaning they can do things a little bit better. You know, they don’t have for example, their taxes, maybe they don’t even have an accountant, they’re not taking all their deductions.
So they are paying out way more than they’re keeping. And then our third kind of our students, and there are the ones that are making the 250, $300,000 range.
Can we go through each one of those audiences? And can you give maybe your best advice kind of quick takeaways for each of those types of agents about what they should be thinking about when it comes to their Taxes? Will that be okay?
Absolutely. First of all, makes sure that they find an accountant who specializes in, at least self-employed people that’s the bare minimum, but it would be even better if it was an accountant who specializes realtors. I don’t know that there’s any other company in the country, other than my company, which is Tax ministers, but maybe they will find one. Also, the worst mistake that people in all three of these categories make is that sometimes they get totally frightened. They try to do their own taxes. They realize how much they’re going to owe, or they think they’re gonna owe, and then they don’t file. and then penalties and interest. Many times we’ll have a realtor come in, who hasn’t filed for three or four or five years. And they’ve even had a visit from IRS saying, Oh my gosh, you better file or we’re going to put you in jail.
So yeah. Make sure you find that accountant. Make sure you file. Now the new people just starting out, they have to be careful because their chances of being sued are great because they might make mistakes. So they need help. The people in the middle section they’re getting ready to think about perhaps being a corporation in which will save them on the social security tax. And they’re entitled tons of deductions because they probably have them and they don’t know what they are.
And then the people in the larger, higher brackets, they definitely are going to be needing to hire a spouse or become a corporation. And also, there is absolutely no excuse for not having a retirement account.
We have a rule at our office that if somebody’s is making over and over, and we decide what the amount would be for each family, depending on how many children they’re supporting and things like that. We have a rule that if they don’t contribute to their retirement account for two years, we fire them. They’re not smart enough to be our client. And I’ve had so many clients that had been with me for 35 years, and they are they’ll call me. And the thing, you know, I’m finally getting ready to retire. And it’s because of you forcing me to open up a retirement account 35 years ago that I can afford to retire, and I’m moving to Florida or something like that. So it’s the retirement accounts; they need to claim the right amount for their car. And by the way, to be very careful the year you buy your car, if you set it up for depreciation purposes, you’re stuck, many, you cannot change.
If you set it up one way. There are two ways you can set up your car. So you have to be very careful, whoever sets it up the first year you buy the car, you’re stuck with long as you own the car, you cannot change unless you do at the Linda way, which we won’t go into. And make sure that they claim office at home. They really, if they have any medical bills or if they have health insurance, I hope they do. Then they would need to do the medical reimbursement plan. And we charged 750 for setting that up. Other people charged lawyers will charge you 10,000. So we are better than the lawyers, in that direction anyway. And of course having a retirement and of course an entity, if you need one for protection, and I think everybody needs an entity, I really do.
I guess that’s my thing. You have to start off with an accountant that knows what they’re doing because you can’t implement all this stuff yourself.
Exactly. Yeah, for sure, when I hired you, my life became a whole lot easier. Not just tax time, but really all year long. So, because I knew what I should be doing, you would kind of tell me when I needed to do what, and it didn’t rely on me.
You guys were proactive. So I just appreciate you so much.
I appreciate it. Because you know, as a real estate agent, we are experts in selling houses. We aren’t experts in Taxes, but we want to keep as much of our hard-earned money. I mean, we earn every dollar. And so you help us do that. So just if people want to find you, how can they find you? Can you tell us where they can go to learn more about you and Tax masters?
Sure. It’s Tax masters and we’re not the one in Texas that had a lot of trouble. It’s www.tax-masters.com. And you’ll find us on the web. If you would like to write me directly. My email address is TaxLady@Tax-Master.com.
Thank you Linda, so much for being here. And if any agent wants your list of deductions. If you’re gathering all your expenses, she’s going to make you fill this out anyway. So go ahead and get it at agentgradschool.com/taxprep. And thank you, Linda, for so much for being here for sharing your Tax wisdom with us real estate agents, you make taxes feel exciting to me and spending money on my business exciting. So thank you for sharing your wisdom with me over the years, and with now all the agents listening to this podcast, I know that we’re going to learn a lot from you.
Thank you. I hope I helped everybody.
Thank you so much for listening to today’s episode. Remember, change happens when you take action. So apply what you learn today to your own real estate business. If this episode has helped you subscribe, leave a review and share it with all your real estate agent friends, and as always, if you want even more great resources to create the real estate business you’ve always wanted and have the life you want outside your business to head over to AgentGradSchool.com and sign up for the free weekly trainings, you’ll get free classes, discounts, and other goodies that only go out to real estate agents on that email list.
See you next week right here on Confessions of a Top Producing Real Estate Agent the Agent Grad School Podcast.
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about your instructor
Hi, I'm Jennifer!
I'm a real estate agent, creator of Agent Grad School and host of the podcast Confessions of A Top Producing Real Estate Agent. I teach real estate agents the exact steps I used to become one of the top 1% of agents in the US using online marketing and modern, out-of-the-box business strategies.