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.
Saving up for Your Dream House
If you want your dream of becoming a homeowner to be reality someday you’ll need to do some careful planning. In this article we’ll look at how to go about saving money for a house. We’ll look at figuring out what fits your lifestyle and what type of account you should use.
How Much Money Do You Need for a Down Payment?
How much money you need for a down payment largely comes down to the real estate market you’re buying in. In pricey real estate markets like New York City or Los Angeles, you’ll need to come up with a heftier down payment (in dollar amounts) since the home prices tend to be higher in these markets. Likewise, the size of your down payment depends on the property type you’re buying. For example, condos and townhomes tend to be more affordable than houses, all else constant.
Once you figure out where and what you’re buying, you’ll need to figure out how much you’d like to save for your down payment. If you’ll be taking out a mortgage, most lenders usually like you to make a 20% down payment. However, if you’re a first-time homebuyer, you may be able to make a down payment as low as 3.5% (bear in mind that you’ll typically need to pay for private mortgage insurance if you’re making a down payment under 20%, adding to your monthly carrying costs).
Although there’s no right number for the size of your down payment, a good rule of thumb is to aim for a 20% down payment in more affordable real estate markets and a 10% down payment in more expensive real estate markets. That way if there’s a correction in the real estate market, you have some extra equity as buffer and you’re less likely to find yourself underwater (i.e. with more mortgage debt than your property is worth).
How Do You Figure out What Fits Within Your Lifestyle?
As mentioned earlier, a key decision about buying a home is the property itself. Ideally, you don’t want to be moving every couple years. Not only is it disruptive, you’ll be paying the soft costs of real estate over and over again. For that reason, you want to buy a property that fits within your lifestyle.
That all starts by asking yourself the question, what property type am I best suited for? For example, if you’re a busy professional, you may be better suited for the condo lifestyle. With a condo you don’t need to worry about mowing the lawn or shoveling the snow. Your monthly maintenance fees will cover those, making condos a relatively low maintenance property.
On the other hand, if you have children or pets, a house with a backyard may be an attractive option. Your kids and dogs tend to have plenty of room to play. In addition, backyards are great for entertaining and barbecues.
If you’re looking for a happy medium, you might consider a townhome. A townhome has the best of both worlds. You get more space than a condo, but less responsibility than a house. It’s a win-win for a lot of homebuyers.
By figuring out the property type, you can start looking at properties in your ideal area and determine how much of a down payment you need to save.
What Type of Account Should You Use?
Generally speaking, you’re better off using a savings account to save money for a house. A savings account provides a safe place to sock away your money and let it grow until you’re ready to use it toward the purchase of a home. You’ll want to take the time to shop around for a savings account that offers a decent interest rate to help your money grow even faster.
Unless you’re going to be saving for five years or longer, mutual funds usually don’t make sense when saving for a home. Mutual funds tend to be more volatile. You wouldn’t want to see half your down payment money vanish because the stock market takes a nosedive before your property’s closing date, leaving you with a huge shortfall.
Another place you might consider saving your money for a down payment is certificates of deposit (CDs). CDs are a time deposit sold by most banks and credit unions. CDs work a lot like savings accounts in the sense that your money is fully protected. Since your money is locked-in, CDs encourage you to be more financially disciplined, making them ideal for those struggling to save. CDs tend to offer an interest rate as good as, if not better than, savings accounts.
Determining a Timeline
Determining a timeline to save for a house comes down to your own personal needs and your income. For example, if your parents would like you to move out from home in a couple years, that will be how long you have to save for a down payment.
Your income is also an important determining factor. All things considered equal, the higher your income, the less time it will take you to save for a house. Although finding a higher paying job is easier said than done, if you’re struggling to save, creating a budget is a good exercise.
A budget can reveal areas of your spending where you can tighten your belt and save even more. For example, if you could cut 10% off your food and transportation costs, that might mean an extra $50 or $100 per month to save toward the purchase of a house.
Sometimes you can set your own timeline for buying a house. For example if you’re renting, you don’t really have a timeline for buying a house. That being said, it’s a good idea to create your own timeline. If you don’t have a timeline, you might never feel there’s an urgency to save.
Let’s say you want to buy a home in three years. Figure out how much of a down payment you’ll need to save. For example, if you need to save a $50,000 down payment, figure out how much money from each paycheck you’ll need to save to reach that goal, then set it up so the money is automatically set aside in a savings account. That way the money is out of sight, out of mind and you’re not tempted to spend it.