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.
Beyond the Purchase Price
When purchasing a real estate property in Canada, it's essential to consider not only the listing price but also the hidden closing costs that can significantly impact your budget. Beyond the down payment and mortgage loan, there are several additional expenses that homebuyers often overlook. In this article, we will discuss ten hidden closing costs Canadian buyers should be aware of, and we will briefly discuss some mortgage loan options to help you navigate the home-buying process more effectively.
Hidden Closing Costs
Here are ten hidden costs to consider when buying a real estate property.
1. Closing Costs
Closing costs encompass various fees associated with the finalization of the real estate transaction. These costs typically include legal fees and administrative fees. It's crucial to consult with a real estate lawyer who specializes in property transactions to ensure all the necessary legal processes are completed smoothly.
2. Home Inspection Costs
Before finalizing the purchase, a professional home inspection is highly recommended. The inspection assesses the property's condition and identifies any potential issues or repairs required. While the cost of a home inspection varies, it is essential to allocate funds for this crucial step to avoid surprises and make informed decisions.
3. Property Taxes
Property taxes are an ongoing expense for homeowners. These taxes contribute to local government services, infrastructure and amenities. Before buying a property, research the area's property tax rates and calculate the approximate annual cost. Property taxes can vary significantly depending on the location and assessed value of the property.
4. Homeowners Association (HOA) Fees
If you are considering purchasing a property within a condominium or planned community, there may be homeowners association fees to consider. These fees contribute to the maintenance, repair and upkeep of shared amenities and common areas. Understand the HOA fees and their frequency, as they can vary from one development to another.
5. Insurance Premiums
Protecting your investment is crucial, which is why insurance premiums should be factored into your budget. Home insurance covers damages and losses due to fire, theft, natural disasters and liability claims. It's recommended to obtain multiple insurance quotes and consult with insurance providers to ensure you have adequate coverage at a reasonable cost.
6. Maintenance and Repairs
As a homeowner, you are responsible for ongoing maintenance and repairs. From routine maintenance tasks like lawn care to unexpected repairs such as plumbing issues or HVAC system breakdowns, budgeting for these expenses is essential. It's advisable to set aside a percentage of your monthly budget for home maintenance and create an emergency fund for unexpected repairs.
Utilities, including electricity, water, gas and potentially other services like internet and cable, are recurring expenses that homeowners must consider. The costs can vary depending on the property size, location and usage patterns. Contact utility providers to estimate the monthly costs associated with the property you are considering.
8. Moving Expenses
Moving costs can quickly add up, especially if you are relocating within a significant distance or have large amounts of furniture and belongings. Expenses may include hiring professional movers, renting a moving truck, packing supplies and temporary storage. Obtain quotes from different moving companies and plan your budget accordingly.
9. Home Renovations and Customization
If you plan to renovate or customize your new home, allocate funds for these projects. Whether it's updating the kitchen, remodeling bathrooms or adding personal touches to make the property truly yours, these expenses can add up quickly. Consider obtaining multiple quotes from contractors and factor in additional costs such as permits and materials.
10. Land Transfer Tax (LTT)
In Canada, land transfer tax (LTT) is a tax levied by the provincial government when a property is transferred from one owner to another. The land transfer tax payable amount varies depending on the province in which the property is located, and whether the owners are first-time home buyers. LTT is typically calculated based on the purchase price or the fair market value of the property, whichever is higher. The tax is payable by the buyer and is due upon closing the real estate transaction.
Mortgage Loan Options
In Canada, potential homebuyers have several mortgage loan options to choose from based on their financial situation and preferences. Here are two popular options.
A fixed-rate mortgage offers a stable interest rate for a specific period, typically ranging from one to ten years. This allows you to have consistent mortgage payments throughout the term, providing predictability and security.
With a variable-rate mortgage, the interest rate fluctuates based on market conditions. The interest rate is usually lower than that of a fixed-rate mortgage, but it can change over time, impacting your monthly mortgage payments.
When purchasing a real estate property in Canada, it's crucial to consider the hidden closing costs beyond the listing price. By accounting for these costs, you can avoid financial surprises, and ensure a smoother home-buying experience. Additionally, explore various mortgage loan options to find the one that best suits your financial situation and long-term goals. Being prepared and well-informed will help you make confident decisions and enjoy your new home with peace of mind.