With the passing of the Tax Cuts and Jobs Act (TCJA), 2018 is shaping up to be a good tax year for most self-employed individuals, including realtors. While in previous years you may have felt like you could make do with online tax preparation software, or use one of the many budget tax firms that pop up in February and close again after the 15th of April, this year you should consider other options. Under the new tax bill “making do” simply just won’t do.
Here are two ways the tax professionals at Molen & Associates are helping realtors pay less tax:
Business Use of Home
To be fair, this isn’t exactly a new one, but I promise this goes deeper than just “use the right deductions and save money”. Form 8829, the Business Use of Home deduction has a long history. The deduction allows taxpayers to claim an area of their home that is used regularly and exclusively for business. Using this, you apply the amount of mortgage interest, property taxes, insurance, utilities and other expenses at the business percentage use of your home. The form 8829 itself is one often examined by the IRS and many people claim the deduction not fully understanding its implications.
What you may not know is that beginning in 2014 a new Simplified Business Use of Home deduction was added. This simplified version allows you a standard dollar amount per square footage of your home used for business. It also is deducted without use of the Form 8829, which gives you the benefits of the deduction without the downside of including the form and the scrutiny that follows. This also means that your mortgage interest and property tax deductions are all used as itemized deductions in addition to the standard amounts for the simplified deduction, rather than removing the used interest and tax amounts from your itemized deductions to include them as Business Use of Home deductions.
The final point I’ll make regarding this deduction is that it really doesn’t add up to all that much. A very common Business Use of Home deduction would amount to maybe a $1,200 deduction. In a 22% tax bracket and including the 15% self-employment tax, you’re saving 37% of that $1,200 in taxes, or $444. Now I’m not saying $444 isn’t a lot of money, of course saving that rather than paying it to Uncle Sam is a great benefit, but the larger benefit is one that most realtors don’t see. The amount of deductible mileage increases dramatically when you can include your home as a work location. You see, driving from home to work in most cases is not tax deductible, but driving from a work location to another work location is. By qualifying for and claiming the Business Use of Home deduction, either the Form 8829 or the Simplified version, you no longer drive from home to work. You drive from work to work. Those miles will quickly add up to a much more significant tax savings.
Qualified Business Income – Section 199A
One area that realtors should be particularly keen on this next filing season is the Qualified Business Income (QBI) deduction. You’ll find this in section 199A of the new provisions. The section itself is muddled with limitations, phase outs and other obfuscations. Tax and legal professionals are still trying to determine exactly how and when this deduction will apply, and many are expecting tax professionals and the IRS to disagree on some of its interpretations.
For sake of brevity, I’ll attempt to provide you with the basic details. Please understand that this is not a full representation of the complexities of this new deduction. Generally speaking, the QBI is a deduction for 20% of the profit for your self-employed trade or business. Let’s look at this in a hypothetical example:
You’re a realtor that made $120,000 of gross income this year. You are single with no dependents and your annual expenses for 2018 were $40,000. Your profit is $80,000, and since your QBI deduction is based on 20% of your profit, you qualify for a deduction of $16,000. The result is your taxable income reduces by $16,000 and you save your marginal tax bracket rate, or 22% on that amount. 16,000 x .22 = $3,520 in tax savings. This is brand new in 2018 and is highly complex. For example, this deduction will only apply to certain industries, but it can also apply for any single individual with $157,500 or less in adjusted gross income ($315,000 for married couples).
Whether or not you qualify for these deductions is yet to be determined with finality, but one thing is for sure. You need a full-time tax professional to review your specific tax situation and to guide you through applying all of the deductions you do qualify for. At Molen & Associates we’ve created a helpful guide to common Real Estate Professional deductions to try and get you started. Once you meet with one of our professionals, you’ll quickly understand why we specialize in self-employed taxpayers.
Call today for your free 15 minute consultation!
Senior Tax Manager