What You Need to Know for the Upcoming 2021 Tax Season
While 2020 may be behind us, the lingering demons known as last year’s taxes still meander in the dark depths of our minds. COVID-19’s impact on how you prepare your IRS bill is unique, which is why getting ahead on your taxes now will help you avoid any squabbles with dear old Uncle Sam.
As we all know from the recent GameStop-Reddit stock manipulation debacle, if that man is on your side, anything is possible. Let’s explore how we can all make Uncle Sam happy and fulfill your tax obligation as a U.S. citizen and real estate agent.
The Basics: 2021 Tax Season
Before we dive into the (mundane) nuances of how COVID-19 and other influences will affect your taxes, it’s important to note the basic facts of this upcoming season.
- April 15th, 2021: You must file your 2020 taxes by this deadline. However, you can file for an extension and push this due date back to October 15th.
- Standard Deduction: For single filers, the standard deduction is $12,400; for married couples, it’s $24,800.
Real Estate Agents - Self-Employment Tax
In almost every situation, real estate agents are considered to be independent contractors and must pay self-employment tax as a result. This tax is owed on top of federal, state, and local income taxes.
Licensees should make tax payments based on their quarterly estimated tax liability. Because taxes are not removed from commission checks, licensees should set aside 30-35% of their income for taxes. Any licensees who fail to pay enough taxes through their estimated tax payments may be charged a penalty.
The Protecting Americans from Tax Hikes (PATH) Act
Enacted in 2015, this act added support to small business growth by allowing business owners to depreciate certain capital expenditures in just one year instead of over multiple years. By making changes to the IRS Section 179, agents receive some additional tax relief when it comes to business-related purchases.
Deductions for Real Estate Agents
To get the most out of your taxes, here are several tax deductions that you should not overlook. Keeping diligent records on the following activities will help you save money and reduce what you owe to the IRS.
- Home office deduction
- Standard auto deduction
- Office supplies and equipment
- Software and business tools
- Marketing and advertising expenses
- Fees, licenses, memberships, and insurance
Keep in mind that, to qualify as a deductible, your real estate business expenses must be:
- Ordinary and necessary
- Directly related to your business
- And a reasonable amount
Make sure to also keep a diligent record of the following expenses:
- Gross receipts for income
- Purchase records
- Expense reports
- Travel and transportation receipts
- Asset records for any property that you own and use for business purposes
Marginal Income Tax Bracket
One of the biggest misconceptions of the marginal tax bracket is the belief that the rate assigned to your salary bracket is flat. For example, if you made $1,000,000 selling high-end luxury real estate, the entire salary would not be taxed at 37%. Instead, a part of it would be taxed at 10%, then another part at 12%, and it would continue changing as you reach the highest tax bracket.
With a small uptick in inflation, the marginal income tax bracket has only changed a few hundred dollars between 2019 and 2020.
|2020 Marginal Tax Rates||Single Tax Bracket||Married Filing Jointly Tax Bracket||Head of Household Tax Bracket||Married Filing Separately Tax Bracket|
|37%||Over $518,400||Over $622,050||Over $518,400||Over $311,025|
Source: Internal Revenue Service
Did Standard Deductions Go Up in 2020?
You’ll have the choice to choose the standard deduction or itemized deductions on your 2020 taxes. Itemized deductions take longer to file because you need to go through each deduction. However, this method usually adds up to be more than simply choosing standardized deductions. Please consider talking to a tax professional about what would be best for your situation.
2020 Standard Deduction by Filing Type
|Filing Type||2020 Deduction|
|Married Filing Jointly||$24,800|
|Married Filing Separately||$12,400|
|Head of Household||$18,650|
Tax Season 2021 - What You Should Consider
First and foremost, you need to consider your tax deductions (income subject to federal income taxes) and tax credits (refundable or nonrefundable credits that lower your tax bill). When it comes to tax credits, you’re receiving a credit; a refundable credit pays you back a difference while non-refundable credit simply reduces your tax bill to zero. Some deductions to consider include:
Coronavirus Implications on Your Tax Bill
Unfortunately, there are some items you’ll need to note due to laws implemented by the CARES Act. Consider the following factors while filing your taxes.
Stimulus Checks: These checks will act as a refundable tax credit in 2020, providing you an advancement on your 2021 tax refund; they will not be taxable income.
Paycheck Protection Program (PPP) Loans: With appropriate usage, these loans should be forgiven; expenses paid with loans cannot be deducted from taxable income, and forgiveness must be approved by the Small Business Administration.
Unemployment Benefits: Paying taxes on these benefits is required; if you chose not to take out taxes from benefits, you will be required to pay quarterly taxes or pay the entire bill April 15th.
529 Plans: If this money was not used for school due to remote learning challenges, you have 60 days to put the money back. This plan now covers apprenticeship programs and paying off up to $10,000 in student debt.
Major Changes to Retirement Plans
The CARES and SECURE Act has also had a massive influence on how we withdraw money from our 401ks and IRAs. While most of these laws deal with CARES and are temporary, it’s still good to review these changes for your clients.
$100,000 Withdrawal Before 59.5 Years Old: Before CARES, you were not allowed to withdraw from your 401k or IRA until the age of 59.5 years without a 10% penalty; that law allowed you to take out up to $100,000 until the end of 2020 penalty-free.
RMD Minimum Age Pushed Back to 72: The SECURE Act has pushed back the Required Minimum Age (RMD) from 70.5 to 72; the CARES Act permitted you to skip RMDs altogether for 2020, allowing your savings to accrue without penalty.
Traditional IRS Deposit Extension: The CARES Act will allow owners to continue depositing money past the 70.5 age limit, which should help lower your taxable income if you decide to take this path.
Taxes can be brutal and, well, taxing - pun intended. Instead of spending the next two months trying to figure out what you owe the IRS, look into hiring an accountant. They’ll have a better understanding of what you owe and will allow you to concentrate on your career. It’s money well spent when you only have to worry about your job as a real estate agent.
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