Now more than ever, Americans are stressed about correctly filing their taxes — a year of working from home, unemployment payments, stimulus checks and COVID-related tax credits have complicated an already tedious and confusing process.
North Carolina-based real estate investor and tax professional Dalaine Bradley shares what real estate agents need to know about getting missed stimulus payments, handling unemployment, filing for an extension and catching up on back taxes.
Outside of a later tax deadline (May 17), how has COVID impacted our taxes this year?
There are a lot of new COVID credits and one of them is the recovery rebate. If an agent did not receive their stimulus check for any reason, they can now add that credit to their tax return. There is a $10,000 [credit] if they missed the work due to taking care of someone who had COVID, and another $5,000 if they had to miss work due to being diagnosed with COVID.
For real estate professionals with children, the child tax credit has increased to $3,600 for children under the age of six and to $3,000 for chidden ages six to 17. The credit is expected to be paid out as a monthly stipend starting in July.
Lastly, there are two COVID refundable credits up to $15,000 for self-employed individuals, 1099 employees, and business owners who were out of work at any time from April 1 to December 31.
Another big change is that a lot of people have been working remotely. How can agents take advantage of home office deductions?
A lot of people are scared to take the home office deduction because, before 2017, you were only able to take the home office deduction if you worked from home or worked from home temporarily, as a W-2 employee. Now you can only take the home office deduction if you are self-employed.
What that means is you have a dedicated space in your home that you use for business. So let’s say that you are in your bedroom. Let’s say that your bedroom is 400 square feet and you have a little corner in your bedroom where you have your desk, your computer, your printer and whatever else you need. Let’s say that area is 50 square feet, you will now be able to take the deduction of 50 square feet out of your bedroom.
You can’t take any more than 300 square feet for the home office deduction, and the biggest thing you need so you don’t get audited for that is proof. Make sure that you measure the area where you’re working, even if you’re only working there for half a day. As long as you can prove it, you should not be scared of the audit.
So, I’m looking at a story I wrote about 2019 taxes and it mentioned agents filing a Schedule C on a 1040 personal return. Are there any other filing options agents should be aware of?
As a new real estate agent, you would have a 1040 [form] and then a Schedule C, which is how your self-employment income is attached to that 1040. However, as you grow, you may get a limited liability corporation (LLC).
If you have not submitted S-Corp paperwork with the IRS, which separates you completely from the business when it comes to taxes, you will still have a 1040 personal return with a Schedule C. A lot of people don’t know that the LLC and a sole proprietor are taxed at the same rate, so just keep that in mind that an LLC and a sole proprietor or individual, you still will have your 1040 and your Schedule-C together.
As you grow and you’re with a broker, you can ask your broker, ‘Hey, am I able to now able to put myself on a payroll?’ What you can do then is file an S-Corp 1120-S form under your own business, and then you would be under payroll under your own business. So the broker will be paying your business [and] your business will pay you every two weeks like a W-2 employee.
Once you file that for your business, it generates a Schedule K-1 form and that K-1 is the remaining net from the company after all your expenses. Then that K-1 will now be on your 1040 return as an individual.
Good to know! So let’s get down to the part everyone hates: making tax payments. What’s a reliable strategy for making quarterly tax payments so you’re not paying a huge lump sum on tax day?
The best thing to do is contact your state and let them know that you want to start paying quarterly taxes. They’re going to give you a [tax] percentage and you would guesstimate what your earnings would be and divide that by four. Then you’d use that estimation to pay a portion of your Social Security tax, your Medicaid tax, your income tax and your self-employment tax each quarter.
I tell a lot of the real estate agents that we work with to find a sweet number that you’re comfortable with because we want to make sure that you’re enjoying the fruits of your labor when it comes to being self-employed. But you also want to be able to keep up with taxes, so if there is a huge bill that you get for any reason, you’ll have the money available. It’s all about budgeting.
So if you make $5,000 a month, you at least want to take 20 percent of that and put it aside in a separate account for taxes. When you pay your quarterly taxes, you will already have those estimated payments available for your state.
[The budgeting] works the same way if you want to do a yearly payment, which is fine because they can account for write-offs and avoid overpaying. When it comes to quarterly taxes, it’s easy to overpay and that’s not really beneficial unless you’re making a [higher income].
So, tax day is quickly approaching on May 17. What can agents do if they’re totally unprepared to file on that day?
I definitely suggest filing an extension, so you won’t have to file your taxes until October 15. That way, you’ll have plenty of time to file instead of having to scramble around.
If you’re not ready now, another extra month is not really gonna help. So [file an extension] before you get penalized because the penalty goes up every month that you’re late. And some of the penalties can be forgiven as well, due to COVID.
What are the penalties and how can agents have them forgiven?
In order for you to get the [federal penalty] forgiven, contact the Internal Revenue Service customer service department and tell them why you’re late. Sometimes, depending on who you get on the phone, they’re not going to care. But you may find someone who will be lenient with you and they may forgive it. It is a hit-or-miss strategy, but it doesn’t mean that you shouldn’t ask.
But the biggest penalty is not even with the federal government — it is with the state and every state differs. In California, you can get penalized for as much as 25 percent of the amount due. So that’s why I would suggest filing extensions for federal [taxes] and state [taxes] so you’re not hit for penalties for both.
What about agents who are facing the gargantuan task of catching up on back taxes? I definitely know that would be the time to call in a professional.
When it comes to back taxes, you definitely want to get those filed because there may be a refund that you’re entitled to and after three years, you forfeit that refund. So, I’d say file your current taxes and go back and file your back taxes because you want to get prepared to pay that penalty, especially as you’re as late as 2017.
Another thing is to just give yourself grace and forgive yourself. People are super hard on themselves because they’re scared. The best thing for you to do is be consistent and organized throughout the year.
If you’re organized throughout the year and set deadlines for certain things, you won’t find yourself in that situation again. The penalties alone will teach you a lesson. Once you get penalized, you’ll say, “I’m never doing this again. It was not worth it.”
Seek professional help and prepare and budget for [taxes] because this is something that’s not going away. Tax planning doesn’t start in December — tax planning is an all-year process. It includes planning your quarterly estimated payments, budgeting and looking at different loopholes as far as investments.
It includes a retirement fund where your money is working for you.
For those who have been DIY-ing taxes, how can they go about finding a reputable tax professional who understands the real estate industry?
A lot of people think you have to find someone in your area, and that’s not always the case. What’s more important is to find someone that can understand your particular situation. You also want to find a tax professional that’s licensed — there’s a lot of people out there that talk about taxes and work on people’s taxes, but they’re not licensed by the IRS.
You want to make sure that they have an electronic filing identification number for their firm and they have a PTIN, which is a tax preparer identification number, which means they can legally file your taxes with the IRS. If they don’t have either one or both of those numbers, they’re illegally filing your taxes and they can get fined by the IRS for doing so.
If the bottom of your 1040 says self-prepared despite paying someone to do it, that means they used software for individuals instead of software for professionals. But if the bottom of your 1040 lists their firm, name, address, phone number, and PTIN number, that means they’re licensed. There are a lot of people who scam during tax time.
Second, you will want to find someone who is well-versed in real estate and any new tax law changes within your state. For example, California changes tax laws all the time, even in the middle of a pandemic and even in the middle of tax season this year. So you want to find someone who understands the new tax law changes for your state, but also understands how these updates impact real estate and how they can potentially affect you in a negative or positive way.