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.
Comparing Mortgage Rates: Where to Start
When it is time to buy a home, the amount of interest you pay on your loan will significantly impact your monthly payment. For most people, buying a house, apartment, or condo is the biggest purchase they will make throughout their lifetime. Even a 1% difference in your mortgage interest rate could mean you will pay tens of thousands of dollars more or less over the lifetime of your loan. So, when it comes to comparing mortgage rates, how do you navigate it? We’ll show you.
How Your Credit Affects Your Mortgage Rate
Your lender should offer you the best possible rate according to the marketplace and your credit rating. Your credit history and credit score help your lender decide how much of a risk you pose to them as a borrower. A lower credit score and a few late payments may not exclude you from getting a loan for your home, but those negative attributes mean that you will pay a higher interest rate on your mortgage. Not all lenders offer the same rates across all credit score tiers.
How the Loan Type Affects Your Mortgage Rate
When you choose a home loan, you will make a few crucial decisions. You can choose between a 15-year and 30-year repayment term. Some lenders may also offer 10-year terms. Choosing a shorter term for your loan means you will make a higher monthly payment. You'll also be free from the monthly obligation of making a house payment sooner, and you will pay less total interest over the life of the loan if you choose a shorter term.
How to Get Good Mortgage Terms With Bad Credit
If you have concerns about qualifying for a mortgage due to your income or credit status, you have options other than a conventional loan.
A mortgage guaranteed by the Federal Housing Administration (FHA) has some of the most relaxed credit requirements, with a minimum FICO credit score of 500. You must make a down payment of at least 10% if your credit score is below 580. Borrowers with higher credit scores may be able to make a down payment of just 3.5% of the total loan amount. FHA loans require borrowers to carry mortgage insurance, which bumps your monthly payment up a bit.
If you have credit challenges, you may be able to avoid the super-high rates imposed by some banks if you qualify for a VA loan or USDA loan. Both of these mortgage types have strict requirements, but VA loans do not have a minimum credit score, and USDA loans require a FICO credit score of 581.
Your Interest Rates Help Determine Your Monthly Mortgage Payment
Even a slight increase in your interest rate could mean you will pay tens of thousands of dollars more over the lifetime of the loan. Compare lenders to find the best possible rate, even if you will only save a fraction of a percentage point.
Here's how your monthly payment (not counting PMI, property taxes and insurance) changes with your mortgage interest rate.
30-year mortgage of $250,000:
- 3.5% interest: $1,123
- 3.75% interest: $1,158
- 4% interest: $1,194
- 4.25% interest: $1,230
- 4.5% interest: $1,267
Adding just 1% to the interest rate of a $250,000 mortgage causes the monthly payment to increase $144.
How to Find the Best Mortgage Rates
When comparing mortgage rates, check with multiple lenders before signing paperwork. You can compare rates online to get an idea of the rates you may pay, but to get a rate offer tailored to your specific profile and needs, you will have to apply for a mortgage with various lenders.
A loan estimate includes your total projected monthly payment with a breakdown of the taxes and insurance. The loan estimate is designed to help you quickly and easily compare offers from multiple lenders. It will clearly show your interest rate, fees and the total amount of interest you will pay over the life of the loan as a percentage of your total loan amount.
You may be able to negotiate lender fees, including underwriting fees and application fees. You'll get a loan estimate within three days of applying for a mortgage with a lender.
Shopping around and comparing mortgage rates may sound like a hassle, but it is worth the effort. Rates are low now, so if you have great credit and want to purchase a home you have excellent timing. Borrowers with excellent credit may be able to get a 30-year fixed-rate home loan with an interest rate of less than 3%. 15-year fixed loans could have interest rates as low as 2.5%.