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For many people, particularly real estate investors, a proactive approach to tax planning is a key tool in building long-term financial success. Proactive planning enables real estate investors to benefit from advanced long-term tax strategies that help them reach their financial goals quicker. Even in the short term, a proactive approach to tax planning can save you thousands of dollars next tax filing season.
Of all asset classes available to investors, real estate is perhaps the most tax-advantaged. If you invest in real estate, incorporating advanced tax strategies can help you scale your investing activities from a side hustle to a multi-million dollar real estate empire.
Despite these facts, many high earners and real estate investors still follow a reactive approach toward tax planning: one that could potentially leave them on the hook for paying thousands of dollars more in taxes each year.
In this article, we’re exploring why that approach doesn’t make sense for real estate investors. We’ll explore the benefits of a proactive approach to tax planning and walk you through what’s involved in our proactive tax planning approach here at Hall CPA.
What is Reactive Tax Planning?
If you’re only just starting to learn about proactive tax planning, it’s likely that you’ve been taking a reactive approach to tax planning until now. You’re not alone in this: tens of millions of people follow this method.
A reactive approach to tax planning is really an oxymoron, as there’s no real planning involved. Instead, early each year, you pull your tax documents together and then send them on to your tax preparer. They’ll prepare your tax return, and you’ll submit it. Job done.
This approach works just fine for people with regular W-2 incomes, but for high earners, business owners, and real estate investors, it’s often not the best approach. Throughout the preceding year, there were likely all kinds of actions you could have taken to minimize your tax burden. While there are some actions you can take before filing your return, like contributing to a retirement plan, in general, the impact of these actions is very limited.
What is Proactive Tax Planning?
A proactive approach to tax planning unlocks a wide variety of benefits, but ultimately, they all add up to one key concept: you get to keep more of your hard-earned money. In the short-term, proactive tax planning enables you to take advantage of all the opportunities available to you, and can help you save tens of thousands of dollars from Year 1. Over time, the impacts of this compound. In the longer term, a proactive approach helps you take advantage of sophisticated tax strategies that enable you to build wealth for you and your family in a shorter time.
There are countless examples of the benefits of taking a proactive approach among our clients at Hall CPA. Let’s take a look at one: a successful dentist who we’ll call Joe. Before working with us, Joe had used a reactive approach to tax planning. The end result? Joe’s federal tax liability was $174,000: an effective tax rate of 24.4%. Ouch.
By partnering with Hall CPA on a proactive approach, Joe reduced his federal tax liability to $43,000 the following year, an effective rate of 5.56%. By relying on our guidance to strategically acquire short-term rental properties, Joe shrank his tax liability by over $130,000 – and that’s just in the first year.
The benefits of this approach are clear, but what does the process of proactive tax planning actually look like? Let’s take a closer look.
Proactive Tax Planning With Hall CPA
Successfully adopting a proactive tax planning strategy is a process that demands commitment and a mindset shift. You shouldn’t think of your tax advisor as just the person who fills in your tax returns; they’re your financial coach.
This requires you to work with advisors with different skillsets. Look for strategic thinkers with an intimate knowledge of the tax code, an understanding of risk, and a willingness to go close to the boundaries of the tax code to save you money. Be prepared to work closely with your advisor, particularly at the beginning of the engagement.
At Hall CPA, we follow a multi-stage approach to proactive tax planning.
Step 1: Onboarding and Discovery
The process begins with a kickoff meeting with your dedicated advisor. Ahead of the call, you’ll complete a questionnaire and provide your tax return for the previous financial year. During this initial meeting, we’ll explore your financial goals and start to lay the groundwork for a personalized tax planning strategy.
Step 2: Planning
The planning phase is an intensive 30-45 day sprint where you’ll work closely with your advisor to identify tax-saving opportunities. In this time, you’ll meet twice with your advisor, walk-through relevant tax strategies for your situation, and get your most pressing questions answered.
At the end of this process, you’ll receive a written tax plan personalized to your unique situation. This plan will document the tax strategies most beneficial to you and the action steps you need to take to realize the benefits they offer.
Step 3: Ongoing Support
While most of the planning work for your tax strategy takes place upfront, you’ll have access to your advisor throughout the year. Our service includes regular check-in calls with your advisor to discuss any strategic adjustments or changes to your financial situation.
In addition to this, you’ll also receive email support from your advisor. We know how fast the real estate industry moves and we know how important it is for you to be able to reach your tax advisor on short notice. That’s why we’re committed to answering emails in 24-48 business hours.
You’ll also get access to our Tax Smart InvestorsTM community. That includes benefits like membership our private Insiders group, a community of like-minded investors aiming to build wealth through tax-efficient real estate strategies, as well as access to weekly Live Q&As and monthly workshops led by industry experts.
Start Proactively Planning Your Tax Strategy Today
Ready to switch up your personal tax planning strategy from a reactive approach to a proactive approach that could save you tens of thousands of dollars? You’ve come to the right place.
At Hall CPA, our team of real estate tax professionals specializes in developing advanced tax strategies that help investors achieve their financial goals faster.
Interested in learning more? Schedule an initial consultation today.