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.
Be Aware of All the Expenses
Buying a house is getting more expensive with every passing year. In fact, the average millennial today faces housing prices 39% higher than their parents did in the 1980s, according to Business Insider. To add fuel to this fire, young people face a ceaseless student loan debt burden that millennials cite as the largest single obstacle to home ownership.
In such a challenging economic environment, it’s important to know exactly what you’re getting into when you choose to buy a house. Down payments on a mortgage are just the beginning of the expenses of buying, preparing and maintaining a new home. After that’s all dealt with, you’ll still have a laundry list of expenses you’ll want to have covered before surprise expenses start to wear you down.
The first financial obstacle you’ll have to overcome is getting a mortgage. Your mortgage will make home ownership possible, but it will come with long-term costs that you’ll need to keep up with.
Your mortgage is probably the largest financial decision you’ll ever make, so it’s important to keep a level head while you approach one. The typical bank or lender will cover 80% of the cost of a new home, and you’ll pay it back over time with interest.
The interest rates on a mortgage are either fixed-rate or come with adjustable interest rates. In most cases, mortgages will require you to pay the same amount of money on a monthly basis. Mortgages are typically amortized, meaning that the ratio of interest to principal (the money you borrowed) will change as you pay back your loan. Each month you pay back a piece of your mortgage, this ratio will change.
Mortgage Payment Calculator
When you apply for a mortgage, your lender will come up with an amortization formula that will be used to form your payment schedule. The life (length) of your loan also plays a part in how much you’ll have to pay every month. Each month you pay back a piece of your mortgage, the ratio of interest to principal will change.
If your mortgage is fully amortized, you’ll have to make payments as scheduled until the life of your mortgage comes to its end.
If your mortgage is a fixed-rate one, every amortized payment is the same amount.
If your mortgage is an adjustable rate one, the fully amortized payment changes with every change to the interest rate on your loan.
In the end, a loan with a longer life translates into a lower monthly rate that will be paid off over a longer period of time. This comes with a downside, as the longer your mortgage goes without being paid off in full, the more you end up spending on interest.
After these more technical aspects of a mortgage have been covered, you’ll want to consider all the other expenses that come with buying a house.
The first major expense you’ll have to cover on the long road to paying for a house is the down payment. As mentioned, a bank or other lender will typically cover 80% of the cost of buying a home. They will require you to make a down payment of 20% immediately, and you’ll pay the rest off over time as per your arrangement with the lender.
20% is the golden standard for a down payment, though this figure can vary for a variety of reasons. The more you pay on your down payment, the less you’ll have to pay moving forward, and the less you’ll lose to interest in the long run. For these reasons, it is ideal to pay more upfront, when possible.
Insurance is a major expense that varies widely depending on your location and what you need to be covered. Home insurance can be a complex subject and is broken down in many ways. The most important home insurance is coverage for the structure of your home.
Coverage on the structure of your home can be further broken down into a myriad of disasters that can damage your house’s structural integrity. These costs vary based on location, but you should make sure you’re covered for the most likely disasters to affect you in the very least. If you’re buying a home in certain parts of the American Southeast, be sure to consider flooding and hurricanes. If you’re buying a home in California, be sure to consider wildfires.
In any case, fire, flooding, lightning and routine wear-and-tear should be included in a good home insurance policy. To forgo on these factors could cause serious financial trouble down the road.
If you feel it necessary, you can also get coverage for personal belongings (highly recommended). Another common addition to home insurance is liability protection. With liability protection, you get coverage for lawsuits over bodily harm or property damage that you or a family member have been found to have caused someone else.
Lawyer Fees and Health Inspections
Don’t forget about the lawyer fees! These won’t add up to much compared to your other expenses, but you’re looking at anywhere from $1,000 to $2,000 altogether. These lawyer fees should cover registration for the mortgage, a tax certificate and a title search on the property.
Property taxes vary by locality, but you will have to pay an annual rate for owning the property. This rate depends on what municipality or county your property resides in, the size of the property and several other variables.
Furnishing Your Home
This is a completely subjective expense, but you’ll want to consider it ahead of time. If you want a well-furnished home, you should set aside at least $20,000 for it. The average cost for furnishing a studio apartment in the United States with all the essentials is $3,000 (and this is for the cheapest unused furniture available), according to Furnishr.
Optimizing Your Future Passive Expenses
Lastly, you’ll want to consider how you can optimize the bills you’ll be paying for the property. This is where you can save some real money with creativity.
For starters, good insulation will save you some serious money on climate control. Many architects are interested in designing homes so they receive more sunlight during the winter and less during the summer. For you, the buyer, there are also countless ways to minimize the passive spending that will come once you’ve moved in.
Yes, this is all a pain to think about, but dealing with these factors in advance will save you a world of heartache and trouble in the future.