Tax Tips to Take with you into 2021

Part 1: What records to keep and why?

Why does this fail for most? Keeping every single receipt gets old by February and that is why
most people end up failing because they are saving the wrong records, or doing too much!

Part 2: Want to do more with your retirement accounts?

We often get questions about how to invest? Where can you get the money from? One of the
main ways we talk about investing is through your retirement accounts. We will go into detail on
how to do this and why. Some of you may be asking, well isn’t that money supposed to be for
retirement? Yes, and we can show you how to make more than your IRA ever would.

Part 3: When to call your CPA?

Perhaps one of the most popular questions we get is why get a CPA? Oftentimes so many
Americans make it through life just fine without a CPA, but we always say, why live just fine,
when you can thrive? When you can do things your family or ancestors never knew before?
Money is a huge game, and you need help in learning how to play it. That’s why we’re here, to
show you all the endless opportunities.
Introduction:
It would be an understatement to say that 2020 was a year none of us were expecting. When we
talk about finances and money tips, we know that there are always times where things will be out
of our control. The purpose of the game is to have everything set in place in case of anything. So
if you were already doing this before 2020, we hope things went well for you. If not, there are
some tips you can take into 2021 to consider, and we hope that these tips will help you learn
what to do with your money, spending, and why. Karla Dennis and Associates, Inc. knows that
your money is precious, and oftentimes we have the right intentions but don’t make the right
moves. Here are three ways to change your game in 2021.

PART 1: Change the way you keep your records

Okay, so yes we’re starting a tax book with record-keeping...what a cliche right? Well, believe it or not, in
our experience we are still seeing business owners, real estate investors, self employed etc, not
record-keeping properly. The most important thing for someone who wants to achieve levels they’ve
never achieved before is to change the way they think about their money and work towards their money
goals. Yes, it’s another struggle or thing on your to-do list, but if you look at the bigger picture, you’ll see
that it’s in your best interest to put in the work. We cannot stress this enough, especially if you want to
become a real estate investor or own your own business someday, you have to get this down as things get
more and more complicated.

What to change?
The first thing we would recommend is to ​get more organized with how you actually file.​ It
may not be enough to just save every single piece of paper or receipts. The point of
record-keeping is to actually have a system that tracks your items in a way that is easy for you or
your accountant. Breaking it up into smaller groups or parts can make it easier to keep track of
everything. For example, your small groups could look like this:

- Temporary files
- Permanent files
- Financial statement files
- Real Estate professional backup

If you are an aspiring real estate investor or already invest, there are many reasons why you may
need a temporary filegroup. Every year, you will have income from and expenses for your
properties—and paperwork that corresponds to these transactions. For ease of use with your
accounting system, keep backup copies of these materials in alphabetical files that are “closed”
each year once your tax return has been prepared. At this point you may be thinking, do I still
have to keep every single paper? It depends, and this is where financial literacy comes in. In
order to truly know what to keep or not, you need to know what papers are vital, and what may
not be.
We can give you a general sense of what to keep, and from there you can take that into
the next year to change the way you look at record keeping. For example, whenever you pay an
invoice, we recommend that you keep a copy of that invoice and note on your copy the following
information: • Date paid • Check number • Amount paid

What is done in the firm?

We stamp each invoice with a rubber stamp that has a list of these items and a blank line for each
one. The blank lines prompt you (or your bookkeeper) to write in the indicated information as it
applies to that specific invoice. The invoice copy is then filed alphabetically by vendor name.

Note: If you don’t have a lot of invoices each year, you might want to create more inclusive file
folders marked A–C, D–F, etc. This way you can quickly find your reference information
without having to sort through as many individual file folders.
One of the main takeaways from this is keeping track of what each paper means, and what is
happening. This determines what space it should be in. With that being said, be careful of
expenses that end up being capitalized. These are expenses that actually represent improvements
to a property.

For example, a room addition would be an improvement. Invoices representing additions to the
basis (capitalized expenses) should be filed with your permanent files. Once you understand
where the money is going or how that is going to affect you, it’ll be easier to figure out where it
should be put. This may not be something you can learn in a week, so that’s why we recommend
working on this all year long and also, of course, working with a professional.

How should it look?

Let’s go back to the basics, whether your files are online or in your home, here is what they
should look like. At the end of the year, create a new set of file folders and start filing incoming
invoices in those folders. At this time of the year, you will most likely have two sets of
folders—the past year (for the tax return that hasn’t yet been filed) and the current year. So for
example, if it is January 2021, you’d have a folder for 2020, and a new one for 2021.
If you do your record keeping online, the IRS will accept scanned copies of receipts and bank
statements. For these kinds of files, setting up a folder on your computer or server for each
vendor and year may work well. Here at Karla Dennis and Associates, Inc., we recommend using
an app on your phone that can scan important papers and organize them that way. One of the
main apps Karla recommends and uses herself is ​Hurdlr​. Apps can be really helpful and easily
accessible since they’re on your phone, and that’s usually with you everywhere you go!
After your tax return has been filed, take the invoices and file folders for that year and store
them in a separate box or file. Clearly label the box or folder with the year so you can easily
pinpoint when you can shred the documents.

What documents do you need to keep as permanent records?

This question may be needed for those that keep every paper forever. I am sure you may be one
or know one, so let’s break this down. Permanent items to keep are ongoing issues, such as the
basis for the property and underlying notes, as well as information related to the business
structure in which you hold the property, if applicable. Other items you want to keep would be :

-closing statements for the sale of the property

-any previous property owned (e.g., a Section 1031 like-kind exchange that was performed
- invoices and contracts for improvements made to the property
-any sales documents for portions of the property (remember these should be filed under the
property name)
-keep files related to any property-related agreements such as insurance policies
- government notices
-rental agreements
-management agreements for each property

Of course, some documents may be confusing or you may feel unsure about what to do with
them. If you sell a property but will continue to receive payments for it, keep records of all
contacts with the rest of your records in your permanent files for as long as you have transactions
related to that property. When you sell a property and have been paid in full for it, transfer all the
files for that property to your temporary files. At the end of the tax year, these files will become
part of the records kept at year-end.

You also need to keep permanent files for any business structures you are using. For example, if
you hold your property within an LLC, you must retain the documents related to its creation plus
your annual minutes and any annual filings required for that LLC. It is important that you keep
all your business structure paperwork handy. This is a must know, but if you are ever sued, that’s
the first thing you’ll need to produce. Failure to produce the necessary documentation might
mean you haven’t run the business properly and could put all your other assets at risk. So if you
have a spouse that keeps every single paper, maybe don’t be too hard on them. Both of you can
work towards figuring out what papers are necessary and which not.
Financial Statement File
Many professionals use Quickbooks or other software to track their finances and files. We
recommend using an online platform so that everything is safe on the web. Regardless of how
you keep your records, if you have a lot going on, we highly recommend you working alongside
a professional who can guide and lead you through the process.

If you use any of the tips for this year, we highly recommend this one. Being organized and
smart with your paperwork takes time, so don’t fret if it seems overwhelming. Take this year to
slowly go through everything and set yourself up for success in the future.

PART 2: Investing Your Retirement Account

Okay, so this one also throws people off, because who in their right mind would take their
retirement money and invest it? We know it can sound far-fetched if you’re not an investor yet,
but trust us when we say it's done more often than not. Folks with real estate money, or investing
money use this tactic to create their wealth and make more money than ever before. Before you
knock it, hear us out. Learn how this process works, and why it could be something you can do
for this year. If you have been wanting to get into real estate investing and didn’t know how-
well now is your chance to learn.

Before we begin, let’s get your question answered. You may be asking, what kind of accounts
are able to do this? Well, more than you would think! Here are some accounts that can be used
as self-directed accounts for real estate or other alternative investments:

• Traditional IRA • Roth IRA • SEP-IRA

• Individual 401(k)
• Spousal IRA and Roth IRA
• Health Savings Accounts
• Educational Savings Accounts
• Rollover Retirement Accounts • And More
As you can see, there are so many types of accounts, that we’re going to give you a short
rundown on how you can use some of these types to invest.

​IRA​-----> ​An Individual Retirement Account i​ s one of the most common accounts in the United
States. In order to use an IRA to invest, you’ll need a self-directed IRA. This means that any
property that you purchase​ must be ONLY​ for investment purposes and cannot be used by you
or your family. (Bummer, we know- but it’s important to know these facts!) If you are going to
buy real estate within an IRA, you must use cash, and the IRA must pay all ownership expenses.

More to know: Another main factor is that to buy or sell property through your IRA; you will
need a custodian. A custodian is an entity that specializes in self-directed accounts that can
manage the transactions for you. Since your ​IRA​ does not pay taxes, you can’t take advantage of
the deductions that come with owning real estate. Because you’ve paid cash, there are no
mortgage interest payments to deduct, nor do you get the benefits of property tax deductions or
depreciation. If you sell a property, both parties agree on a price and terms and then request that
your custodian sell the property on behalf of your IRA. All money will go back into your IRA,
either tax-deferred or tax-free, depending on the makeup of your IRA. Investing in property
through your IRA is very tricky but can be very rewarding. To get the right information for your
case, it is vital to speak to a specialist when it comes to making these kinds of decisions.

401k​----->If there is an account more popular than an IRA, I’d be the 401k. Perhaps one of the
most popular retirement accounts, so let’s see how it can be used to invest. Also, solo 401ks are
flexible because these accounts can be used to invest in alternative investments such as real
estate, precious metals, notes, private placements, etc. ​In a real estate investment,​ the solo 401k
can be made into an account, and that account can be used for real estate investments. The
checks are written out to that account, and the cash-flow would all travel into that 401k. If you
want to invest in real estate or purchase a home through your 401K, it’s possible. You can either
borrow the money from your 401k or reduce or eliminate your retirement savings contribution
temporarily. Borrowing from your 401k may be a better option than a traditional IRA withdrawal
because the income won’t be taxed. With a 401k, you may be able to borrow a large sum of
money; however, ​keep in mind that you will be required to pay back the loan with interest.
Investing in real estate through your 401k can have a high payoff. It can even lead you to retire
with even more money than if you would have never utilized that original sum.

HSA​------>Next up, we have a Health Savings Account which is designed to be used for medical
expenses, and the money placed into an HSA account is generally tax-deductible. That money
inside of the account is grown on a tax-free basis, meaning that any interest, dividends, or capital
gains you earn are going to be nontaxable. (Think of the money in an HSA as an investment for
retirement, and not a savings account.) It is better off to save that money, invest in stocks, real
estate, whatever you’d like. By the time you retire, that money is now yours to use.

According to ​Breia​, “The simplest way to buy real estate is to take the money in your health
savings account and use it to make your real estate purchase. This is only possible as long as you
are using a self-directed HSA. A self-directed HSA lets you have a lot more freedom to choose
the way the money is invested in your account.” Another significant factor about using an HSA
is that the money can go towards the downpayment of a property and that investment will still
count as your tax-free HSA account. The money can even be invested in real estate stocks if you
do not want to purchase a space physically. An HSA is an excellent example of how you can
take an unlikely retirement account and still put it towards a real estate investment.

If this has been interesting to you, please look into more accounts that can be used to invest in
real estate, and if you want more information on real estate investing, check out our social media
accounts!

PART 3: Get Yourself a Tax Professional

If you do not have a tax professional yet, and you’re doing more than W-2 work, we cannot
stress this enough. If you plan to do big things this year, plan on getting one.. That should be the
first thing you do. In life we get doctors, trainers, teachers etc. This is the same thing!

If you already have a tax professional-or don’t, one of the lingering questions is usually when to
call or contact them. Is it only during tax season? Are they there for you all year long?
Lucky for you, we are here to provide you with tips on when to call your tax professional this
year!

Here is a quick rundown list of when to call your Tax Professional!

- Before you purchase a home or property

- Before you sell a home or property
- Refinancing your properties
- Buying a car
- Taking a trip or vacation
- Getting married
- Having babies
- Preparing for college
- Getting a divorce
- New advisory team
- New investment types
- Changing jobs
- Buying Insurance
- Healthcare coverage
- Taking care of others
- Major illness
- Death in the family
- Estate planning
- Forming a legal entity
- Dissolving a legal entity
- Moving titles to properties
- Buying a Business
- Selling a business
- Leaving large gifts to family members
- Making charitable donations
- Planning for retirement
- Taking money out of retirement accounts (sound familiar?)
- Scams and thefts

You may have hired someone to help you with you accounting but there is a difference between
accounting and tax law
Bookkeepers:​ A bookkeeper categorizes your expenses, and organizes everything based on their
knowledge and understanding. The main issue with only having a tax preparer or a bookkeeper is
that they do not always have the experience or knowledge to grant you the tax deductions that
you may qualify for. They are not tax professionals.

Accountants:​ Accountants have gone to school and gotten a degree in accounting. However,
they are not professionals when it comes to income tax. The average accountant knows how to
book journal entries, financial statements, and balance sheets. They do not know how to do
income taxes and how to go about the tax code.

These people are great when it comes to your day to day stuff, but when it comes to filing your
taxes you will want to work with someone who is licensed.

Local License:

Tax Preparers:​ Registered income tax preparers are either self-employed or work for tax
preparation companies on a seasonal basis. During annual tax seasons, income tax preparers
typically work full-time or part-time schedules. These individuals are able to prepare your taxes
for tax season, but usually do not work with you throughout the year like a tax accountant would.

CPA:​ Certified Public Accountants have a license in their state. Meaning they are certified in
their accounting, but may not be well versed on tax law. Most CPAs specialize in particular
subtopics, so they may not always be the best person to go to for all kinds of tax questions. A
CPA usually does their job of filing your tax returns, but does not plan them alongside you.

Federal License :

EA:​ Enrolled Agents are lisc. In all 50 states. They learn the federal taxes and learn the state
level in all 50 states. They are much more qualified in taxes, due to the requirements. They must
have at least 5 years of tax experience, or take the EA Exam. Which consists of a tough, three
part exam that tests them on all aspects of tax. Enrolled agents are federally recognized as tax
specialists.

Tax Strategists:​ If you add a Masters in taxation, this is someone who went out and learned all
the tax laws. When dealing with tax strategists you are hiring a different level of professionals.
These are folks that have gone through a professional, educational, and personal training. Tax
strategists are known for predicting tax consequences and more importantly, tax loopholes, all in
a legal way- by using the tax code. As of late, tax strategists have become more and more
popular due to recognition of their efforts and value.

Why do I need a tax professional?

Depending on the situation you’re in, or what your occupation is, you’ll have different reasons
for needing a certain type of tax professional over another. In general, however, tax professionals
offer more than a tax preparation service due to their expertise, knowledge, and time spent with
you as a client.

The main takeaway is this: a tax professional is licensed, knowledgeable, less likely to incite
an audit, and can save you money faster and more efficiently.

If we go back to our example of a doctor, having a tax preparer is like going to a different clinic
each tax season. Whereas having a tax professional, is like having the same doctor look over you
and your progress year after year.

Before you know it, you’ll have a relationship with your tax professional who will know your
past, present and future. They will be able to be in conversation with you throughout the year,
you’ll build trust and you’ll understand why it’s such a worthy expense.
As you can see above, there are many situations outside of tax time to speak with your tax
professional, which is why it’s important to have someone you can go to. This list is just a small
sample of the many instances when it makes sense to consult with them. If you find yourself
wondering, “Should I call my tax professional to let them know about…?” always err on the safe
side and CALL THEM! A five-minute conversation can make a huge difference in ensuring that
you protect your hard earned assets.

At the same time, if you do not yet have a tax professional, ask yourself who can you go to for
advice during any of these events? Help is always needed, and advice and money savings from a
professional is priceless.

Conclusion:
Your tax professional should be someone that you’d be comfortable getting a cup of coffee with.
As you can see, they are going to be involved in your financial matters, and that often includes
personal matters as well.

We hope that you take these three tips into consideration for this year and work all year long
towards making this year and next, different and great! We know that tax season can be stressful,
but perhaps you’re approaching it wrong. When you work all year long, tax season is just another
season, and you’ll already be prepared. ​Set yourself up for success and take care of your
records, look into investing, and call your CPA!