8 Signs You May Be Overpaying Your Taxes

posted on : March 5, 2024 0 Comment

Did you know that a recent study revealed that the average American loses more money to taxes than they do on food, clothing, and housing combined? That is scary to think about, isn’t it? What’s more scary to know is that most people pay more taxes than they are legally required to by law simply because they don’t know “how” to protect themselves from the IRS.

So how exactly do you know if you are overpaying in taxes? The good news is…there are simple steps you can take to find out. To gauge your risk level of lost tax dollars, we have put together a list of 8 signs to help you measure your risk potential:

1. Record-keeping: Bad sign if you do not have a good bookkeeping system in place.

Ever heard of the saying “What gets measured gets managed”? It is just as important to know how much money you have coming in as it is to know how much is going out. If you are not keeping track of your monthly expenses, you can easily lose out on some legitimate tax deductions! Having accurate and timely financial information not only helps you to manage your finances and grow your wealth…but it is also the foundation for an effective tax savings plan as well.

2. Communication: Bad sign if you do not meet with your tax advisor throughout the year.

For those of us who plan on paying the least amount of taxes possible, proactive planning happens year-round. If April 15th is the first time you are thinking about reducing taxes for last year, you have probably missed out on some big tax saving opportunities. Open the lines of communication with your tax advisor to ensure you are maximizing your tax deductions throughout the year.

Remember: some of the most significant and impactful tax saving opportunities need to be implemented as part of your regular decision-making process for your job, business, and investments.

3. Knowledge: Bad sign if you have to explain your situation to your tax preparer year after year.

Not all tax advisors are created equal. Taxes are a very specialized area and there are specific strategies for specific business industries. For example, there are special tax saving opportunities for people in the real estate business. There are also special tax strategies for doctors, or for those in the manufacturing industry. The strategies that work for those in the services industry may not benefit those who are in the retail industry. Make sure your tax advisor is well versed in the tax saving opportunities in your industry.

4. Compensation: Bad sign if you don’t have a plan on how to tax efficiently take money out of your business or investments.

There are tons of different ways to take profits out of your business and investments and each of them has their pros and cons. For example, if you are a C Corporation, you may save thousands of dollars in taxes by paying yourself a higher salary every year. If you are an S Corporation, the opposite may be true where you can save thousands to tens of thousands of dollars by paying yourself the least amount of salary possible. There are also some great ways for you to extract profits out of your real estate completely “Tax Free”. If you don’t have a plan in place to know “how” to extract your profits tax efficiently, you may be over-paying your taxes.

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5. Retirement Planning: Bad sign if you are not currently taking advantage of tax deferred and/or tax free opportunities of retirement investing.

Ask yourself: Are you using retirement planning to significantly reduce your taxes currently? In addition to the typical IRA and 401(k), there are so many different types of retirement accounts that are available for us to save taxes today and save for retirement at the same time. If you pay taxes to the IRS and have not used retirement planning techniques in the past, you are probably overpaying your taxes.

6. Fringe Benefits: Bad sign if you have never heard of the term “fringe benefits”.

There are tons of tax free fringe benefits available where your company takes a tax deduction for perks they provide to you as a real estate investor (and it’s not taxable to you). There are over a dozen of these wonderful techniques including company cars, gifts, education expenses, and travel to name a few. If you do not utilize tax free fringe benefits as part of your business planning, you may be overpaying your taxes!

7. Personal and Business Deductions: Bad sign if you do not know what items you can legally shift from your personal bucket into legitimate business deductions.

In this day and age, it has become harder and harder for us to distinguish between personal and business items. How many of us use our personal cell phone for business? How about our cars? iPads? Laptops? All these personal items that you use day in and day out for your investing business may be legitimate tax deductions. If you don’t know how to shift personal items into business deductions, you may be overpaying your taxes!

8. Tax Savings Plan: Bad sign if you do not have a tax savings plan in place to ensure your profits are protected from Uncle Sam.

Incorporating all of the items we discussed above, the question you should be asking yourself is “What is my tax savings plan?” If you don’t know it or if you can’t verbalize it, then you probably don’t have one. Not having an overall plan on “how” you will save taxes is the most common mistake costing taxpayers to overpay taxes year after year.

A good place to start is by contacting your CPA to discuss…