Top Ten Year End Tax Planning Review (2021)
A lot has happened this year in the real estate market and the general economy. It impacts the portfolio of many Real Estate Investors – The value of our assets, how we want to invest in coming years, and even our retirement planning. It also impacts the 2021 tax issues that will be confronting us in the upcoming tax filing season.
Tax preparation for the April 15th tax deadline is merely tax compliance as opposed to voluntary tax reduction planning. December 31st is the true tax savings deadline. Some of the best tax-reduction moves really need to be done by mid-November or early December. They often take some advance planning.
Getting a head start now could make you a lot happier in April, giving you a bigger refund or a smaller check to write to Uncle Sam. You either pay the IRS, pay a tax preparer, or pay a qualified CPA to come up with some tax reduction strategies.
1. If you own a business, do you have an EIN number, operating agreement, and a separate bank account? IRS audits on small businesses especially real estate businesses have increased.
2. Have you recorded all the income and expenses related to the business on the business bank account? This is a huge audit item for 2021.
3. If you own investment property that was foreclosed or sold as a short sale, have you considered the impact of the cancellation of debt income on your individual income taxes? Have you calculated the loss of sale of investment property?
4. If you generated any kind of active real estate income, have you considered restructuring your business to minimize the impact of self-employment taxes?
5. If you have significant real estate education expenses, have you registered a business in order to minimize your audit exposure by deducting these expenses?
6. If you have significant business expenses and already have a registered business, have you considered converting to a multimember LLC to avoid an audit flag?
7. Have you considered the impact of wasted deductions?
8. Do you understand what your tax filing requirements are for the states where your business is registered such as annual filing, personal property tax returns, etc.?
9. If you own investment property, have you considered conducting a cost segregation study to increase your depreciation expense?
10. If you bought or sold a property in 2021, have you considered the impact of capital gains, adding rehab expenses to the basis of the property, and whether the holding costs (mortgage interest, taxes, and insurance) are deductible in 2021?
Advanced:
1. Oil & Gas: Can use Drilling Costs Tax Deductions to offset:
• W-2 Income
• Capital Gains
• Investment used for an upfront tax deduction will come back to the investor in 2-4 years, plus interest.
2. 1031 to a Large Established Investment Property: 1031 into a large already set-up investment property easily. Get an excellent monthly cash flow, without the headache of being the landlord.
3. QOZF (Qualified Opportunity Zone Fund) paired with an Oil & Gas IDC.
• Defer Capital Gains
• Get Cash Flow Year 1 at 4%, Years 2-10 at 6%
• When tax is due in year 7, use discounting, depletion allowance, drilling costs, depreciation, AND the 10% step-up in Year 6 to significantly cut down the taxes owed to around 60-70%
• Save up cash flow to pay for taxes in Year 7, and end up with a net positive
• ROI: 1.4X-1.8X on investment only
4. Charitable Structure: Use a charitable structure to take advantage of using an itemized charitable deduction to offset taxes owed.
Other Things to Consider:
1. Child Tax Credit
The American Rescue Plan, which was enacted in March 2021, provides a dramatic, one-year expansion of the child tax credit for the 2021 tax year. One of the biggest changes is the amount of credit. For 2021, it jumps from $ 2,000 to $ 3,000 for most children – but to $ 3,600 for children 5 years old and younger. The extra amount ($ 1,000 or $ 1,600) is reduced – potentially to zero – for families with higher incomes, though. For people filing their tax returns as a single person, the extra amount starts to phase out if their adjusted gross income is above $ 75,000. The phase-out begins at $ 112,500 for head-of household filers and $ 150,000 for married couples filing a joint return. The credit amount is further reduced under the pre-existing $ 200,000/$ 400,000 phase-out rules.
2. Child and Dependent Care Tax Credit
For 2021, the child and dependent care credit is fully refundable. The maximum credit percentage also jumps from 35% to 50%. More of your care expenses are available for the credit, too. For 2021, the credit is allowed for up to $ 8,000 in expenses for one child/disabled person and $ 16,000 for more than one. When the 50% maximum credit percentage is applied, that puts the top credit for the 2021 tax year at $ 4,000 if you have just one child/disabled person in your family and $ 8,000 if you have more.
3. Unemployment Compensation
Unfortunately, the exemption only applied to unemployment compensation received in 2020. So, for 2021, Uncle Sam will once again fully tax unemployment compensation as if it were wages.
4. Student Loan Relief
Normally, if a student loan is canceled, forgiven, or otherwise discharged for less than the amount you owe, the amount of canceled debt is considered taxable income. However, starting in 2021, this rule is suspended for most canceled student loan debt that was incurred for post-secondary education. The change is only temporary, though. In 2026, forgiven student loan debt will once again be taxed.
Estate Planning:
1. Make Sure Your Estate Planning is Up To Date:
A. Will or Trusts – Are you fiduciaries, trustees, and beneficiaries still the
same?
B. Health Care Directives – Does this include the HIPAA rules
C. Financial Power of Attorney – Is this up to date?
2. Check Your Beneficiary Designations: on any life insurance, retirement
accounts, bank accounts, vehicles, or real estate.
3. Review Car and Homeowners Insurance Policies: Analyze the coverage you
currently have for your home and car to see if you are properly covered and to see if there are any additional savings available to you.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at WealthBuildingPlan