It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
What Kind of Vehicle Can You Afford?
Welcome to The Finance Mastermind’s custom auto loan calculator. Are you considering purchasing a vehicle, but you can’t afford to pay for it in cash? There’s nothing wrong with taking out an auto loan. In fact, it can be a smart financial decision that can help you drive off the lot in your dream vehicle sooner.
By completing a few simple inputs in our auto loan calculator, such as the loan amount, the length of time and whether the vehicle is new or used, you can figure out how much your monthly auto loan amount would be to see if it’s affordable and makes sense.
In this article we’ll also look at refinancing your auto loan, gap insurance, how to avoid high interest, how to keep monthly payment down and more.
Basic Functions of the Custom Auto Loan Calculator
To get the most out of the custom auto loan calculator, you’ll need to fill in some basic information. Here are the fields.
- How much you are looking to borrow: This is the total amount of money you need to borrow to purchase the vehicle. It’s the purchase price of the vehicle minus your down payment. The difference between those two figures is how much you’ll need to borrow as an auto loan to purchase the vehicle.
- For how long: Auto loans are usually between two and eight years in length. However, try to limit yourself to a maximum of five years, otherwise you could end up in a situation of negative equity, where you owe money on a vehicle that no longer works.
- If your vehicle is new or used: This is self-explanatory. Select whether your vehicle is new or second hand.
- Your interest rate: This is the interest rate you’re being charged on the auto loan.
Once you enter the above information, the auto loan calculator will output the following helpful information.
- Estimated monthly payments: This is the estimated amount you’re required to pay for the auto loan on a monthly basis. Make sure the payments fit within your budget. If the payments are too high, you might consider making a larger down payment or buying a cheaper vehicle.
- Total principle paid: Each payment is made up of a portion of principal and interest. This is the total amount of principal you’ll pay over the life of the auto loan.
- Total interest paid: This is the portion of interest you’ll pay over the life of the auto loan. The longer the length of the car loan and the higher the interest rate, the more this will be. By limiting both, you can save yourself some interest.
Do you currently have an auto loan, but you feel that the monthly payments are too high? Or perhaps you feel that the interest rate is too high. Refinancing your auto loan could help you save money. When you refinance your auto loan, you replace your existing one with a new auto loan that has different terms. You do that by paying off your existing auto loan with a new auto loan
There are several reasons you might want to refinance your auto loan. For instance, let’s say when you were approved you had bad credit. For that reason, it comes with a higher interest rate. But if your credit has improved since then, you could refinance your auto loan and save on interest with a lower interest rate. Instead of accepting a lower monthly payment, you could choose to keep your monthly payment the same and pay down your auto loan even more aggressively.
Another common reason to refinance your auto loan is to lower your monthly payment. For example, if you find the payments are unaffordable or you’re looking to qualify for a mortgage, but the auto loan payments are hurting your ability to qualify, you might consider refinancing. You can lower your monthly payments in a couple ways: by lowering the auto loan’s interest rate or by stretching it over a longer period. Just keep in mind that by stretching your auto loan out over a longer period you’ll pay more by way of interest over the life of the auto loan.
If someone has co-signed on your auto loan and you want to remove them, you might consider refinancing your auto loan. However, in order to be able to refinance you’d need to be able to qualify for the auto loan on your own.
These are just a few of the most common reasons why you might choose to refinance.
Besides the auto loan amount, the interest rate has a major bearing on how much the auto loan will cost you over its lifetime. If you have a higher interest rate, you will end up paying more toward interest on your auto loan than toward the principal. Furthermore, having a higher interest rate on your auto loans means that you’ll qualify for a lesser auto loan amount.
The interest rate you pay on your auto loan depends on several factors, including your credit score, where interest rates are at and competition among lenders.
If you have a good credit score, you should have no problem getting an auto loan at the best interest rate available. However, if your credit score is damaged, you’ll likely have to pay a higher interest rate.
Likewise, where interest rates are at also has a bearing. For example, if interest rates are currently high, you’ll likely have to pay a higher interest rate on your auto loan than at a time when interest rates are low.
Competition can also influence the interest rates on your auto loan. All things considered equal, the more competition among auto loan lenders, the more likely the interest rate is to be lower.
Gap insurance is an optional type of auto insurance you may have heard of. Gap insurance, short for guaranteed auto/asset protection, protects you in case your vehicle is stolen or totaled. It’s also referred to as gap protection, because it covers the gap between what your car is worth and the amount you owe on your auto loan.
Gap insurance comes in handy in situations where your auto loan amount is greater than the market value of your vehicle. Auto dealerships usually offer it when you’re buying a new car.
Gap insurance is often an overlooked type of insurance coverage, but it can come in handy in certain instances. For example, when you buy a new car, it almost always loses value the moment you drive it off the lot. This creates a gap right off the bat between how much the car is worth and the amount of your auto loan.
Some vehicles don’t hold their value as well as others. If you own a vehicle that depreciates quickly, it can put you in a negative equity situation.
If you stretch your auto loan out over seven or eight years, this has the potential to create a gap between your auto loan and your vehicle’s value.
For the three reasons mentioned above, you might consider signing up for gap insurance to protect yourself.
Understanding the Break-even Point
It’s not a pleasant situation to be shopping for a new car when you owe more on your existing one than it’s worth. The break-even point of an auto loan refers to when your vehicle’s trade-in value is roughly the same as the amount that is currently outstanding on your auto loan.
If you trade in your car before the break-even point, you could end up having to fork over some of the money from your savings to cover the auto loan. Why? Because you might owe more on your loan than your car sold for.
If you’re financing a new vehicle, the break-even point usually occurs four or five years in with most auto loans. By knowing the break-even point, you can decide when is the best time to sell or trade in your vehicle.
How to Avoid High Interest
The simplest way to avoid high interest is to negotiate a lower interest rate, and to shop around for the best auto loan.
By negotiating a lower interest rate, more money of every auto loan payment will go toward principal and less toward interest. This in turn will help you pay off your auto loan sooner.
It’s also a good idea to shop around. Don’t simply go with a dealership or car company for your auto loan because it’s the most convenient. See what else is out there and try to negotiate a better deal.
If your credit score is an issue and you don’t plan to apply for an auto loan for a while, you can take steps to improve it. By doing that, your credit score can be better when you apply for an auto loan, helping you negotiate a lower interest rate.
How to Keep Monthly Payments Down
You can keep your monthly payments down on your auto loan in three simple ways: by making a larger down payment, negotiating a lower interest rate or by stretching your auto loan out over a longer period.
If you can afford to, you might consider making a larger down payment on your vehicle. When you do that the monthly payment on your auto loan will be lower since you’re borrowing a lower amount.
Another way to keep your monthly payment down is by negotiation a lower interest rate on your auto loan. By shopping around on your auto loan and negotiating, you can get a lower interest rate.
Last, but no least, you can stretch your auto loan over a longer period. This can make sense if you’re qualifying for a mortgage, but the high monthly payment on your auto loan is preventing you from qualifying for as much as you had hoped. Before doing this, be sure to consider how much more in total interest it will cost you by stretching out the auto loan over a longer period to make sure it makes sense.
Banks versus Dealerships
When it comes to taking out an auto loan, you can go through your bank or the dealership/car company. Whether it makes sense to go through one over the other depends on the auto loan terms being offered.
My best advice is to shop around. A dealership or car company is a good first stop for financing, but it shouldn’t be your only stop. By shopping around at banks, you can see what else is being offered.
If you’d prefer to take out your auto financing with your bank, but you’re being offered a better deal from the auto dealership, you might consider showing your bank the better deal you’re being offered. Your bank may in turn be willing to match it. The bottom line is that you have nothing to lose by shopping around.
Before shopping for a vehicle, it’s a good idea to get pre-qualified. Getting pre-qualified on a vehicle is a lot like getting pre-qualified on a home. When you get pre-qualified for a vehicle, the bank or dealership looks at your income, down payment, credit score and any other debt you might have (i.e. credit cards, student debt, mortgage, etc.). Based on this, you’ll find out how much you qualify to spend on a vehicle.
It’s important to keep in mind that just because you qualify to spend a certain amount on a vehicle, it doesn’t mean you should spend that much. Find out what the monthly payments would be and how much interest it would cost you over the life of the auto loan and see if you’re comfortable before taking out an auto loan for this amount.
Co-signing Tips and Considerations
If you’re having difficulty qualifying for an auto loan, you might consider getting a co-signer. A co-signer is someone who helps you qualify for an auto loan. The co-signer’s income, down payment and credit score are all considered when approving the auto loan.
As such, you’ll want to look for someone who is strong in all those areas. For example, if your uncle has a lower credit score than you, it probably doesn’t make sense for him to co-sign, but if he has a better credit score than you, that’s when it can help your auto loan application get approved.
If you’re thinking about co-signing for someone on an auto loan, before signing on the dotted line, make sure it’s someone you trust. If the individual you’re co-signing for were to miss any of the auto loan payments, it will be as if you missed the payments yourself.
Not only that, you’ll be responsible for making those payments. Being asked to co-sign on an auto loan isn’t a decision to be taken lightly. It’s important to sit down with the individual and make sure you both are on the same page and understand each other’s role and responsibilities. The last thing you’d want is the co-signing of an auto loan to ruin your relationship.
Factoring in Taxes and Fees
When buying a vehicle, it’s important not to overlook taxes and fees. Taxes and fees are the so-called hidden costs of buying a vehicle. Taxes and fees will depend on the state you’re in buying in, so it’s a good idea to ask about them ahead of time and do your homework.
You may be required to pay the taxes and fees out of pocket, or you may be able to roll them into the auto loan. If you’re required to pay them out of pocket, you’ll want to hold some money back from the down payment on your auto loan, so you have enough money to cover them.