It’s nearing the end of April & once again you have decided to extend your taxes because you either did not have sufficient time to gather all of the materials needed to complete them or you are emotionally tied to sending that 4 or 5 figure check to the IRS; we understand neither of these are easy & over *10 million people likely do, too.
The truth is, who else in your life demands personal information & wastes hours of your time only to end the relationship with one of the biggest checks you will write all year? Not to mention the thought lingering over your head that it will all be done again in 11 months. They could at least write you a handwritten letter thanking you for your donation, right?
Fortunately, we have found 3 ways to take the strain off of the relationship & put things a bit more at ease.
When David came to Wealth Without Wall Street he was like most real estate professionals. He made an impressive income but never felt like he was getting ahead. He did things the way that everyone always told him. After we identified some key cash flows within his financial blueprint we pinpointed 3 major points that bogged him down when paying his taxes & suggested he implement these 3 strategies to overcome them.
1. Leveraging Your Dollars
As a real estate investor you take every opportunity given to you to use someone else’s dollars to purchase a home. When you do this, you have money growing elsewhere. At its most basic form, this is leverage.
According to an online dictionary, the definition of leveraging is “to use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable or to use (something) to maximum advantage”.
If you are paying your taxes with cash out of a bank then you are not paying taxes to the maximum advantage. When you spend cash every dollar that you spend stops compounding. This means that each of these dollars will never earn for you again.
By leveraging your dollars (link), you use borrowed capital to spend while your money continues to compound & grow for you. This way, your money never stops growing.
2. Stop Paying Quarterly
Would you agree that your career as a real estate professional is seasonal & cyclical? When you constantly put (every quarter) one of the biggest checks that you write into someone else’s control for the entire year you’re putting yourself at more risk in the case that you hit a slump. But for what purpose do you pay quarterly?
Is there a penalty in not paying your taxes quarterly? Yes. Have you ever talked to your tax advisor about what that penalty is? If it were less than $1000 a year to be able to have access to your money all year long, would it be worth it to you?
3. To Defer or Not to Defer
Common advice to real estate professionals is to defer the taxes of the gains on their investments within tax-deferred qualified plans like SEP IRA’s, but does this make common sense? If taxes are deferred this means that you are intentionally waiting to pay the taxes at a later date. What are you waiting for?
We have been told that we can get a tax deduction today by funding an investment like a SEP IRA & deferring the tax liability to a later date. In order for this to make common sense we have to agree to one of two realities. The first, we expect to be at a lower tax bracket in retirement (which means we’re either making less or we have more deductions than we have today). The second, we expect for the marginal tax rates to be lower at a later date.
My question stands, do you believe that taxes are going to be lower in your lifetime? If so, then deferring the taxes may be a strategy for you. If no, than you may want to reconsider deferring those taxes.