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.
Ready to go House Hunting?
You’ve decided you’d like to buy a home, but you can’t afford to pay for it in cash. That’s no problem. A mortgage can help you get the home of your dreams. Getting a mortgage can seem like a daunting task, but it doesn’t have to be. In this article we’ll tell you everything you need to know about getting a mortgage.
How Much of a Down Payment Do You Need?
A down payment is the money you pay ahead of time in order to get a mortgage. It’s subtracted from your mortgage loan and represents your home equity at the beginning.
Lenders usually prefer that you make a 20% down payment; however, as a first-time homebuyer, that can be a daunting task. Thankfully, you can buy a home with a much smaller down payment — in fact, as little as 3.5%.
The Federal Housing Administration (FHA) is a government agency that helps homebuyers get approved for mortgages. It accomplishes that by guaranteeing part of the mortgage loan. This is how you’re able to only put down 3.5% and possibly still get the lowest mortgage rates available.
If you’re putting down less than 20% on a property, most lenders usually require that you purchase private mortgage insurance (PMI). No, this isn’t insurance that protects you — it’s insurance that protects your mortgage lender in the event that you fail to repay your mortgage. PMI gets added on top of your mortgage and represents an added cost for homebuyers, so be sure to factor in its cost if you’re putting down less than 20%.
Making a down payment of 20% on a property does have its advantages if you can afford it. In this case, you won’t need to buy PMI, plus you may get more favorable mortgage terms, including a lower mortgage rate.
Don’t make the mistake of putting every penny toward your down payment. It’s important to set some money aside for closing costs. These are the expenses that you’re required to pay out of pocket when buying a home. Examples include a home inspection fee, land transfer tax, real estate lawyer fees and moving expenses.
How to Get Pre-Approved
Before you start looking at properties, it’s a good idea to get pre-approved for a mortgage. A pre-approval involves a lender looking at your income, assets and credit, and confirming the maximum purchase price you can afford to spend on a home.
It’s important to note that a pre-approval isn’t a guarantee that you’ll get a mortgage. Although a mortgage pre-approval is helpful in the sense that you’re more likely to only look at homes within your price range, the missing piece of the puzzle is the property itself. If the lender doesn’t like the property for whatever reason, it could turn down your mortgage approval.
Now that you have a better understanding of what a mortgage pre-approval is and what it isn’t, let’s take a closer look at how to get pre-approved.
When getting pre-approved for a mortgage, your finances are basically an open book for your bank. Your bank will ask you for various documents to verify who you are and that your finances are in order (more on this below).
Once you’ve submitted the documents to the lender, it usually takes about two to four weeks to get pre-approved. Once you’re pre-approved, the lender will usually provide you with something in writing. Once you have this in hand, you can confidently go out and start looking at properties.
What Information/Items Do You Beed Before Meeting with a Mortgage Broker?
Whether you’re getting pre-approved for a mortgage at the bank or through a mortgage broker (someone who acts as an intermediary between homebuyers and lenders), it’s important to come prepared. Here are some of the information/items you’ll need before meeting with the bank or a mortgage broker:
- Personal Information: A mortgage represents a large sum of money. To verify your identity and make sure you are who you say you are, your mortgage broker will most likely ask you for personal information such as your date of birth and government issued photo identification. You may be asked for your social security number (SSN) so your mortgage broker can do a credit check.
- Employment Documentation: If you’re a salaried employee, your mortgage broker will usually ask you for a letter of employment, most recent pay stubs and W-2s for the last two years. If you have any other sources of income like a side hustle, you may be asked for additional income documentation.
- Asset Information: To ensure you’re a responsible borrower, the lender will most likely want to see information on your assets. Assets are things that you own. Examples of assets include investments, vehicles and any other properties you might own.
- Down Payment: Related to your assets, the lender will want to know the source of your down payment. As such, you’ll likely need to supply financial statements for the last 30 to 90 days. If you’re receiving money as a gift toward your down payment, you might be asked to come with a gift letter as well.
What Options Are There for Mortgages: Pros and Cons
Once you’ve found a home that you like, you’ve made an offer and it’s accepted, it’s time to get a mortgage approval from a lender. There are two main types of mortgages: conventional mortgages and FHA mortgages.
A conventional mortgage is when you’re making a down payment of at least 20%. Conventional mortgages come in two main varieties: fixed rate and adjustable rate.
Fixed rate is, as the name implies, when your mortgage rate stays the same for the length of your mortgage term. So, if you have a 30-year fixed rate mortgage, your mortgage rate and payment will stay the same for 30 years.
A variation of that is the adjustable rate mortgage. With the adjustable rate mortgage, your mortgage rate and payment may change during the life of your mortgage. The advantage of this is that if interest rates were to fall, you’d pay less by way of your mortgage; but if rates were to rise, you’d pay more. Before taking an adjustable rate mortgage, it’s important to make sure you’re okay with this added risk.
An FHA mortgage is one that’s backstopped by the government. With an FHA mortgage, you can make a down payment of as little as 3.5%, making it a lot more affordable for first-time homebuyers to get into the real estate market.
How to Find a Mortgage That Fits Your Needs/Resources/Lifestyle
There isn’t a one-size-fits-all mortgage for everyone. The reality of the situation is that everyone’s finances are different. What may work for your neighbor may not work for you.
If you’re someone who’s risk adverse or a first-time homebuyer, you’re probably better off sticking with a fixed rate mortgage. That way you’ll know exactly what your mortgage payments will be, making it a lot easier to budget. If you’re someone who’s less risk adverse, you might consider an adjustable rate mortgage.
The bottom line is that you want to choose a mortgage that fits your needs, resources and lifestyle.