After writing all of these lovely posts about early retirement, you’d think by now I’d have shared my affection for our accountant. The Wizard of my Oz. The Swami of my Savings Plan. The Shining Light in a cold, dark world…
Okay, that’s a bit much. But he is pretty good at what he does, having saved us a lot of headaches and money, while being a friendly Minnesotan to boot. That’s good enough for me.
Good thing then, that the day after I wrote about early retirement acceleration, I had a scheduled annual check-in with the “Wizard.” See, a good accountant isn’t just for preparing your taxes like good ol’ H&R Block. He or she is also your tax strategist.
We covered off on three topics:
- The Airbnb experiment
- Early retirement acceleration plans and healthcare, specifically
- Mrs. Cubert’s growing business needs
With the Airbnb, I just assumed I would treat the property like our current long-term rentals from a tax perspective. My accountant was quick to point out that Airbnbs (as with hotels) are handled with a schedule C. It’s a common business.
Unlike long-term rentals, I’ll be taxed an extra 15% on profits for social security and medicare. This is the same as with any hotel or B&B business. In addition, the options for depreciation are more limited. Sure, an Airbnb, just like a hotel is a depreciable asset, but you can’t accelerate that depreciation as a tax strategy.
We’re accelerating depreciation on one of our four rentals to mitigate pre early retirement tax bills. This is a good tactic, right up there with socking dollars into 401Ks and health savings accounts, while you’re earning more, prior to early retirement.
Still, the Airbnb will more than make up for its slightly less stellar tax treatment in that it will generate nearly 33% more cash flow than our current rentals. That’s what I’m forecasting anyhow, and it’s predicated on me busting ass to get that place ready for prime time. Stay tuned.
That Early Retirement Acceleration Thing
We then talked about my plan to retire early in July 2019. I appreciated how my accountant’s ears perked up when I raised this topic for this first time back in 2015. Good news is he still likes the plan. He said it was very sound, and noted that anytime someone makes a decision to go from employed to self-employed, it’s the smartest decision one can make, from a taxation perspective.
Well, that’s a good start on this topic! Still, I needed to know more about what to expect with health care before we did a little dance and we drank a little wa-tuh.
(Trivia: Did you know the drummer for the Red Hot Chili Peppers, Chad Smith is a St. Paul Minnesota native?)
It turns out that if you own your own business, whether it’s an Airbnb, a blog, or a property management company, you can deduct 100% of your healthcare premiums from your taxes. Bam! This confirms what I wrote on Monday. I just hadn’t considered this next facet…
To sweeten the deal, my accountant urged us to sign up for a plan with a Health Savings Account, and sock away the max for a family ($6,750.) This, it turns out, is also 100% deductible. So right off the bat, assuming we’re paying $500 a month for our premiums, the total annual deduction is $12,750. We might not owe a dime come tax time. Dance!
Mrs. Cubert needs help!
We moved on from there to discuss the growing pains of my lovely wife’s practice. She works really hard and sees patient after patient, rarely finding time to keep up on her book-keeping. The trade-off is clear: If you’re spending your time on the books, you’re not spending time on patients.
So we need to find some part-time help. Question is, do we need to hire an employee? Our accountant comes to the rescue once again. Not that he’s going to be her part-time help of course. Definitely not. But we had assumed we’d need to sign up for payroll services and have to deal with all the taxes and non-sense that come with the administrative side of having true employees.
The good news for us, we can avoid payroll by taking on this part-time help as an independent contractor. As long as the part-time worker can set his or her own hours, we can avoid the hassle. Hooray! This is huge, since we have a nanny and I can personally attest to the “pain in the ass” aspect that comes with payroll.
Do YOU need your very own wizard accountant?
It’s important to recognize when you need the services of a good accountant. We were doing just fine with Turbo Tax up until my wife started her business and I added rental properties to the mix. Even if you decide you still want to tackle a schedule C on your own, say you’re just starting out with a single business, it may not hurt to simply sit down with an accountant for an hour to see if his or her services might be of use.
Full disclosure: We pay roughly $1,000 in tax prep services each year for the pleasure of having our returns handled PROPERLY. We have one return for our personal taxes – which includes the passive real estate business, and one schedule C for Mrs. Cubert’s S-Corp practice. Note that tax prep fees are also tax-deductible as a business expense.
I can safely say that we’ve avoided perhaps 10s of thousands of dollars in taxes thanks to our accountant, since we started working with him over six years ago. Before then, I was a Turbo Tax jockey. I still highly recommend the DIY tax approach, if you’re a W2 employee and have no side-businesses or other “complexities” to resolve.
To be clear, we don’t just rely on our accountant to prepare our taxes year-in, year-out. We also meet with him around the fourth quarter each year, to prepare for what the next tax bill will look like. More importantly, we discuss tax strategy for long-term optimization, as was the case on Tuesday.
That one hour consult isn’t free, but I’d be a fool to cheap-out on that expense. I walked away from our consult on Tuesday armed with new insights that will help us save thousands in taxes. Turbo Tax can’t do that.
Need a second opinion? Check out what this guy has to say: Here