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This post was updated Mar. 22, 2024.
It’s a new year, which means real estate agents have the crucial task of organizing their financial documents and finalizing their tax strategies for 2023.
While the close of the previous year may have sealed off some tax planning opportunities, a select few strategies still remain viable and offer significant potential to optimize your financial health.
As you gather your 1099s and W2s and reconcile your accounts, don’t sleep on these key tax planning strategies that can truly move the needle this tax season.
Maximize retirement plan contributions
Tax planning is about impactful actions, and few strategies offer as much benefit as maximizing your retirement plan contributions. The choice of which plan to utilize is not a one-size-fits-all decision but instead hinges on your gross commission income (GCI), expenses and overall cash flow. Depending on these variables, one plan could make much more sense than the other.
Here’s a look at the top options (from basic to most sophisticated) and their potential tax savings:
No. 1: Traditional IRA
For 2023, the contribution limit is $6,500, with an additional $1,000 “catch-up” contribution for those over age 50. This plan is a solid choice for agents seeking a straightforward way to save for retirement while reducing taxable income. It also has the lowest limit, which makes it ideal for newer agents.
No. 2: SEP IRA
The SEP IRA limits vary depending on your business structure and income level but almost always offer higher contribution limits than a Traditional IRA. This plan is ideal for sole proprietors looking to save a significant amount for retirement, thus making a significant dent in their tax bill.
No. 3: Solo 401k
For agents operating as an S Corp, the Solo 401k presents a unique advantage. Its contribution limits are generous, but it requires that you have no employees. This plan is especially beneficial for those looking to maximize their retirement contributions and minimize taxes. Used to its highest level, it can generate a $66,000 deduction for 2023.
No. 4: Cash balance plan
The cash balance plan is an excellent option for the highest-earning agents seeking the most substantial deduction possible. It allows for significantly larger contributions, making it suitable for those in the highest income brackets aiming to accelerate their retirement savings and take massive deductions.
But retirement plans aren’t the only way to contribute to a tax-advantaged account.
Consider a Health Savings Account (HSA)
An HSA is a fantastic strategy for those enrolled in an HSA-qualified health insurance plan. For 2023, individuals can contribute and deduct up to $3,850 (or $7,750 for family plans), with an additional $1,000 “catch-up” for those over 55.
HSAs offer a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This makes your HSA the ultimate destination for your dollars if tax efficiency is your top priority.
Avoid procrastination
A common pitfall for many agents is a breakdown in communication with their CPAs, often due to late submissions or incomplete information. The earlier you provide your CPA with all necessary documents, the more time they have to review your file and identify any overlooked deductions thoroughly. Organizing early allows your CPA to work efficiently, potentially saving you a significant amount in taxes from an error because the tax return was being rushed.
Forward-looking strategies for 2024
While it is easy to let your focus remain on the tax bill right in front of you, now is the time to take a long-term perspective and start planning for 2024. Some massive tax planning opportunities are available to you as a small business owner, but they must be done in advance. Here are additional tips for real estate agents to consider now to maximize tax savings in the future.
Verify your business entity type
Business growth necessitates a reevaluation of your business structure. Unfortunately, changes to your entity type can’t be applied retroactively. If an S Corp might benefit you, talk to your CPA to see if it’s an action to take now to enjoy those significant advantages on your 2024 taxes.
Verify your retirement account selection
Particularly for those eyeing the Solo 401k’s substantial deduction potential, coordinating with your payroll is crucial, especially if you’re treated as an S Corp. This preparation can’t wait until the year is over, so if 2024 is the year a Solo 401k makes sense, start this planning now.
Stay informed on tax law changes
Tax law is written in pencil. This means staying informed on changes that could affect your business is essential, and a proactive approach can help you take advantage of new deductions and credits as they become available.
Invest in a professional
Although tax software has its merits, the complex nature of small business taxes often means a CPA can offer invaluable advice and potentially uncover savings that far outweigh their fee. Plus, it frees you to focus on what you do best: selling real estate.
As your gross commission income (GCI) climbs, so does your net income — and in turn, your tax liability. Essentially, the greater your success as an agent, the more critical effective tax planning becomes. Your hard work deserves the highest reward, and utilizing the tax benefits available to small business owners is key to keeping more of your commission income in your pocket.
Jordan Curnutt, CFP, is a Certified Financial Planner professional for top-producing real estate professionals who want to strategically manage their wealth, optimize variable income, build a balanced net worth, and mitigate what is likely their biggest personal expense, taxes. Reach out to Jordan on Facebook, Instagram and LinkedIn.
