It’s that wonderful time of the year again..tax season. While this time of the year may not put you in the spirit like Christmas does, there are plenty of ways to put more money in your proverbial stocking rather than giving that money to the government. 
In this article, we will discuss several important tax deductions for which architects should have an awareness.
Tax Deferred Retirement Plans – When speaking to fellow architects, this tax deduction seems to be the one that is missed the most. The estimate is that fewer than 25% of architects max out their retirement plans. Some architects don’t put enough money into savings (a different but very fixable issue), but many are just unaware how much of their money can be stashed away in the different investment vehicles and the huge tax benefits that will result.
Some architects could have a marginal tax rate at or near 50%. That statement means that for every $2 that is placed in a retirement account, an architect can save $1 on his or her tax bill. That amount of tax savings is great and should be utilized. You also get the added benefit of having more dollars in your retirement account for the future.
If you are a contractor who receives wages paid on a 1099s, there is an opportunity to chip in 20% of your income to a SEP-IRA with a maximum contribution of $50,000. If you are over age 50 then it is possible to contribute an additional $5500 per year as a “catch-up” contribution. As long as the architect does not earn over $250,000 per year, that person can contribute above the 20% of salary to a solo 401k.
If you’re an architect who receives payment as an employee in the form of a W-2, there are yearly limits to 401 (k) contributions and may allow you to only dedicate $17,000 per year to the plan.
Back Door Roth IRA – While this investment vehicle may not provide a tax break in the current year, investments are sheltered from taxes in the future. This choice is far superior than any investment that an insurance salesperson could offer and you don’t have to worry about any pushy sales tactics. This option allows the architect to put $5,000 into an IRA that is non-deductible for both the primary and his or her spouse. That money can then be immediately converted into an IRA. There is one caveat: due to the IRS pro-rata rule, the architect is not allowed to have any other traditional or SEP IRA. There is a way around this rule: rolling the IRAs into your 401k. For more information about Back Door Roth IRAs, please check out our other blog post.
Health Care – Health care can represent a major expense for many. The money is paid for with pre-tax dollars, a benefit gifted to employees by the IRS. Premiums paid for health insurance are a business expense that is deductible, as are health savings account (HSA) payments that are utilized for deductibles and insurance co-pays.
Interest Paid on Mortgages – Many architects find themselves living the “rich architect lifestyle,” whereby the individual has lofty loans which include car notes, credit cards, consumer loans, loans for investing, home equity loans, and the almost-inevitable student loans. While the general rule would be to steer clear of many of these loans, the IRS gives reprieve for those with mortgages by creating a mortgage interest deduction. Let’s say that an architect has $100,000 in student loans and the interest rate is 7.8%. This architect also owns a masterfully crafted home that s/he designed that is worth $700,000 with a 6% mortgage with $300,000 remaining owed on the mortgage. If this savvy architect does a cash-out refinance for $400,000 with a 2.25% interest rate, this future financial guru can pay off his or her student loans and make the payments tax deductible as these dollars are now for a mortgage. While using one’s primary home as an ATM is not generally considered to be a great decision, paying too much in interest is also not advisable.
Business Expenses – Many architects who are self-employed miss out on a great number of tax deductions because they aren’t fully aware of what is deductible. Keeping meticulous records of business expenses will come in handy for the architect who is a contractor, partner or sole proprietor. Meals, office supplies/equipment, travel, medical expenses, continuing education, communication fees, and licensing fees are all included. There are many more expenses that are deductible but you get the point. The largest benefit of ownership of a company instead of being an employee is that all of the deductions make your life infinitely better. Unfortunately, you are still required to pay the employer portion of payroll taxes, but those expenses are deductible too.
Charity – Architects are often very charitable people by nature. If money isn’t what is proffered, the architect will normally donate his or her time. You can deduct any money or items given, the miles driven to donate the goods, and the expenses associated with donating one’s time. While the value of one’s time cannot be deducted directly, the expenses associated can be expensed.
Tax Loss Harvesting – Architects hate losing money. If that architect has a taxable investment account, the government will share in your pain. If you have stocks that you have to “sell low,” you can get a tax break in the form of what is called tax-loss harvesting. An investor can deduct up to $3000 per year of losses from investments against ordinary income.
