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.
Get Informed before You Buy
Real estate is one of the most popular investments out there, and it’s easy to see why. It’s an easy to understand asset class that has low barriers to entry. Anyone with a spare bedroom and a desire to earn a few extra bucks can get started.
Here’s everything you’ll need to know about how to invest in real estate.
How to Get Started
The easiest way to start investing in real estate is to rent out excess space in your house. This can be done on a long-term basis — like getting a roommate who pays monthly rent — or something more short-term in nature. Websites like Airbnb make the latter easy, giving hosts the flexibility to rent out a room whenever they desire.
Some ambitious savers take this concept one step further and buy a house with many spare bedrooms. A single guy might buy a five-bedroom house with a mortgage payment of $1,500 per month. He then rents out the other four bedrooms for $500 per month each. Everyone wins; the landlord makes a nice return on his investment while the roommates get a cheap place to live.
The next type of real estate investing we’ll look at is the more traditional method, which is buying a house or a condo as an investment property. You can only rent out so many extra rooms, but there’s no limit to buying individual units.
Buying a Rental — What You Need to Do
A profitable real estate investment will be lucrative in two ways. You’ll make money each month when the tenant pays the rent, and the property will go up in value over time.
The first thing you’ll want to do when looking at a prospective rental house is figure out how much monthly income you’ll get. Your realtor will be able to help you estimate market rent for the property, but it’s still imperative you do your own research. Call around and see what other properties in the neighborhood rent for. Check online, too. Build yourself a margin of safety by estimating rent on the low side.
Remember there are numerous expenses associated with owning a rental property. Some of these costs include:
- Property taxes
- House insurance
- Appliance repair
- Yard maintenance
- Property management
These costs can really add up, and it’s crucial you set aside cash to deal with these contingencies. The bank doesn’t care if you have to replace a leaky roof. They still expect the mortgage to be paid.
Keep these costs in mind when looking at a prospective property. Also, remember your own personal biases. You might insist on a galley kitchen or a bidet in the bathroom, but will tenants care?
One rule of thumb common in the industry is the “1% rule.” It goes like this:
Ensure You Collect at Least 1% of the Property’s Value in Rent Every Month
If you determine your prospective property will rent for $1,200 per month, it’s imperative you don’t spend more than $120,000 for it. On average, your fixed costs will be between 25% and 50% of gross rent. This leaves you with a net return of anywhere from 6% to 9% annually before paying any interest on the mortgage.
You’ll notice there are vast differences between rents for similarly-valued properties in the same city. Some investors are willing to accept much less monthly cash flow in exchange for what they feel is better price appreciation potential.
This is where real estate investing gets tricky. Speculating on a certain area of town can lead to nice profits if it improves. But it can also backfire, especially when combined with poor cash flow.
Overall, cash flow is king. If there’s one golden rule in real estate, that’s it.
9 Hidden Costs When Buying a House
When purchasing a home, there are hidden requests that you should be aware of. Take a look at them:
- Closing costs: These are fees associated with finalizing the purchase of a property and may include appraisal fees, attorney fees, title insurance, loan origination fees, and more. Closing costs typically range from 2% to 5% of the home's purchase price.
- Home inspection costs: Before purchasing a house, it's wise to get a professional home inspection to assess its condition.
- Property taxes: Property taxes are ongoing expenses that homeowners must pay regularly.
- Homeowners association (HOA) fees: If you're purchasing a property in a community with an HOA, you may be required to pay monthly or annual HOA fees.
- Insurance premiums: Homeowners insurance is essential to protect your investment.
- Maintenance and repairs: Owning a house means you'll be responsible for its upkeep and repairs. Budget for ongoing maintenance costs, such as landscaping, HVAC system servicing, plumbing, and general repairs.
- Utilities: When moving into a new house, you'll need to consider the cost of utilities such as electricity, water, gas, and internet services.
- Moving expenses: While not directly related to the house itself, moving expenses can be substantial.
- Home renovations and customization: If you plan to make changes to the house, such as remodeling the kitchen or bathroom, adding new flooring, or repainting, these costs can quickly add up.
Unless you’re swimming in cash, you’ll have to put a mortgage on your property. Financing a rental property is a little more complicated than a regular single-family home, but not overly so.
Your local bank might not be keen to lend against rental properties. You can either do a little research and see which lenders are more friendly to landlords, or take the easy way out and use a mortgage broker. A broker deals with dozens of different lenders, and they will know which ones to use for a rental property.
You’ll want to have a down payment of at least 20% of the value of the property. If you don’t, private mortgage insurance will be required. This product comes with a premium of between 0.5% and 1% of the value of the home each year.
I’d recommend putting at least 20% down. It’s good to have a buffer zone in case you want to sell the property, and you’ll have a much tougher time getting financing without a decent down payment.
Running a Rental Property
Purchasing a property is only half the battle. Buying a rental is like committing to your own small business. It’s not a whole lot of work, but things still need to get done.
The first step is finding a tenant. This is not to be taken lightly; choosing the wrong renter can easily cost you thousands of dollars in lost rent or damages.
There are some easy steps you can take to minimize your tenant risk, however. These tasks will take a few hours and cost a little money, but they’re well worth it.
First, take the time to talk to them. Ask a lot of questions about where they work, where they come from, and so on. Most people love to talk about themselves, so this won’t be an issue.
Next, get your tenant to fill out a detailed application form. There are hundreds posted online; nobody will ever know if you steal one for your personal use. The more information you can gather, the better.
You’ll want to independently verify the information on the application. Call a former landlord and ask questions. Don’t just ask for a reference, make sure the information is accurate. For example, don’t ask, “Did Tenant rent from you?” Instead, say, “How long did Tenant rent your property?” Repeat with personal references and employers until you feel comfortable.
If any inconsistencies spring up at this point, many landlords will drop the potential tenant right there. They believe small lies can easily mushroom into bigger things.
You can use other sources to gain more information about a prospect, too. Many landlords run credit reports. Some require a criminal records check. Social media profiles are also an excellent source of information.
Once you choose a tenant, you’ll need to invest a little bit of effort into keeping them happy. Most renters will be great. They’ll faithfully pay their rent on time and only complain when something legitimately needs to be fixed. But you’ll still need to prepare for the worst. You’ll need to know both tenant and landlord rights, especially when things get rough. The easy way to do this is just Google “landlord tenant laws [your state].” Find the applicable state law and read all of it.
The easy way to get around all this is to use a property management company. They do all this for you. The only problem is a property manager will charge you a fee for this. This can really cut into your profits.
The Bottom Line
Don’t let all this scare you off. Investing in real estate is a smart way to leverage a relatively small amount of money into a sizable investment. It’s not a hard business to understand, either. There are millions of investors making serious money from investing in real estate. There’s no reason why you can’t join them.