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 $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
Use Our Simple Mortgage Calculator!
Welcome to Finance Mastermind’s custom mortgage calculator. Are you thinking about buying your first property? Our mortgage calculator will certainly come in handy! Our calculator does all the heavy lifting behind the scenes. All you have to do is fill in a few easy fields and you’ll know what your mortgage payment will be in no time.
But that’s not all. We’ll also look at how to calculate mortgage payments on your own as well as the pros and cons of paying off your mortgage early. Let’s get started!
Basic Functions of the Custom Mortgage Calculator
To get the most out of the custom mortgage calculator, you’ll need to fill in some basic information. Here are the fields:
- Home price: This is the price of the home you’d like to purchase. If you’re considering buying a home within a certain price range, you might want to go with a home price on the upper end to make sure you qualify. Then you can adjust the home price to see how it would impact your mortgage payments.
- Down payment ($ and %): The down payment is the money you intend to pay ahead of time to get a mortgage. You can enter a dollar figure or percentage. It’s subtracted from the mortgage amount and is the equity in your home.
- Length of the loan: This is the length of time it will take you to pay off your mortgage in full.
- Interest rate: This is the mortgage rate you anticipate paying on your mortgage. Again, it’s good to be cautious and put a higher number in case mortgage rates go up.
Once you enter the above information, the mortgage calculator will output the following helpful information:
- Principal and interest: You’ll see a breakdown of the principal and interest you’ll pay over the life of the mortgage. Of course, if you pay off your mortgage sooner, you’ll save on interest, but this is to give you an idea if you only make the minimum mortgage payments.
- Homeowner’s insurance: You have the ability to add in the amount you expect to pay for homeowner’s insurance. If you’re unsure about this, it doesn’t hurt to contact an insurance broker to get an approximate cost of insurance for the property that you’re thinking about buying.
- Property tax: This is the amount of property taxes you expect to pay on an annual basis. Property taxes are to help maintain roads and city services. Sometimes you’ll pay them directly to the city, other times your mortgage lender will collect them on your behalf to pay them to the city.
- HOA fees (if applicable): HOA fees, short for homeowners association fees, are the amount of money you must pay on a monthly basis as a condo or townhouse owner. The main purpose of these fees is to maintain and improve properties in the association.
- Amortization schedule: This is a table listing each payment of your mortgage based on your payment frequency (usually monthly). Based on your scheduled payments, the calculator includes an expected payoff date of when you can expect to pay off your mortgage in full and own your home free and clear.
How to Calculate Mortgage Payments: The Equation Used to Calculate a Mortgage
Have you ever wondered how mortgage payments are calculated? Well wonder no more! Here’s the formula for calculating mortgage payments.
M = P[r(1+r)^n/((1+r)^n)-1)]
- M = monthly mortgage payment
- P = mortgage principal
- r = monthly mortgage rate; to get this take your mortgage rate and divide by 12
- n = number of mortgage payments over the life of your mortgage; take the number of years of your mortgage and multiply it by 12
Our mortgage calculator does all the hard work for you, but it’s still helpful to know how mortgage payments are calculated. Don’t worry, there isn’t going to be a pop quiz, but it’s still helpful to know how mortgage payments work.
How to Use a Mortgage Calculator
A mortgage calculator is a handy tool to use. It can help you not only figure out the monthly carrying cost of a home you’re thinking of buying, but also determine if a home is within your desired price range.
As mentioned, to get the most out of a mortgage calculator, you’ll need to input all the required fields. With the figures you enter, try to be as accurate as possible. If you’re not sure about a figure, it’s better to be cautious and overestimate. That way you’re better prepared in a worst case scenario if anything ends up being higher than anticipated.
You may want to run several scenarios in the mortgage calculator. For example, what would your mortgage payments look like if you only make a 5% down payment? How about a 10, 15 or 20% down payment? What if mortgage rates were 3%? How about 4%?
By running all these scenarios, you can get a good grasp of the numbers, so you can make an educated decision when it comes time to make an offer on a property.
How/Why a Mortgage Calculator Can be Useful
A mortgage calculator can be useful because you can use it to make sure you not only qualify for a mortgage, but can also carry the home. You may be able to qualify for a mortgage perfectly fine, but after doing a mock budget if you realize that the mortgage payments will be so high that most of your income is going toward your home with little money to save, let alone have fun, you might decide not to buy the home.
You can use the mortgage payment, homeowner’s insurance, property tax and HOA fees (if applicable) to determine if you can afford the home. Don’t be shy about asking the home seller what they typically spend on utilities in a month. You don’t want to be blindsided by those costs if they end up being higher than you thought.
Figuring out What You Can Afford
Your mortgage payment is a key figure to help you determine whether or not you can afford a property. As a homeowner, your mortgage payment is the most significant cost in most cases. By knowing what your mortgage payment will be ahead of time (before making an offer on a property), you’ll be better prepared.
But your mortgage payment is only one of the expenses of being a homeowner. It’s equally important to factor in other costs, such as utilities, home insurance, repairs and maintenance. By creating a mock budget ahead of time of what you expect your home expenses to be, you can be better prepared so you can make a fully informed decision on whether a home is a good fit for you.
Pros and Cons of Paying off Your Mortgage Early
Are you contemplating paying off your mortgage early? Whether you have the money to pay off your mortgage in full or it’s just one of your long-term goals, here are the pros and cons of paying off your mortgage early.
- By paying off your mortgage sooner, you’ll pay less interest over the life of your mortgage. Depending on your mortgage amount and the interest rate, you could save yourself thousands if not tens of thousands of dollars by paying off your mortgage sooner. That’s more money in your pockets, rather than the bank’s coffers.
- Another reason you might want to pay off your home sooner is that you’ll own it free and clear. You’ll no longer have to make monthly mortgage payments. This allows you to use that cash flow toward something else like saving toward an early retirement or buying an investment property.
- The last reason you might want to pay off your mortgage sooner is less stress. You’ll no longer need to worry about what would happen if you lost your job and needed to pay the mortgage since you no longer have one. You can also tap into the equity in your home for other purposes like investing.
- You’ll no longer be able to claim a tax deduction on your income tax return for mortgage interest. Before paying off your mortgage, you’ll want to run some numbers to see if it makes sense to forgo this tax write off.
If you put all your money into your home, you might be ill equipped to weather a financial storm. For example, if your home needed major repairs or you lost your job, your emergency savings might not be enough to cover it.
- You might also be able to get a better rate of return by investing instead of paying down your mortgage. If you’re risk adverse, you may prefer the guaranteed rate of return you get with paying down your mortgage, but for everyone else there may be better ways to use your money.
- You may also have to pay a penalty if you pay down your mortgage early. Most lenders let you make some prepayments, but if you exceed those prepayments you could be on the hook for quite a hefty fee, negating some or all of your savings.
- You could also negatively impact your credit score. When you pay off your mortgage, you no longer have that credit facility open. If you don’t have any other credit like a credit card, you might find it difficult to apply for and obtain other credit.
- You could also leave yourself open to identity theft. Since your property is owned free and clear, someone could try to take out a mortgage fraudulently in your name.
Pros and Cons of Adjustable Mortgage Rates
An adjustable rate is a mortgage that begins with a low fixed interest rate for between three and 10 years, followed by a period of adjustment in rates. It’s important to recognize that adjustable rates aren’t the same as fixed rate mortgages, where the mortgage rate remains the same for the term of your mortgage.
Now that you have a better understanding of adjustable mortgage rates, let’s look at their pros and cons.
- Your mortgage payment is fixed for the first three to 10 years, giving your predictability. This makes it easier to budget since you know exactly what your mortgage payment will be at the start of the loan.
- Adjustable rate mortgages make a lot of sense if you’re unsure what the future holds. For example, if you’re unsure whether you’ll be moving or selling the home, you may be able to sell the property before the interest rate starts to change on the mortgage.
- Although your mortgage rate can eventually change with an adjustable rate mortgage, there are limits and caps to how much your mortgage rate and mortgage payment can increase, providing you with some predictability and peace of mind.
- If interest rates were to go down, you could benefit. Your mortgage rate could in turn fall. This would allow you to decrease your mortgage payment or you could keep it the same and pay down your mortgage even faster. It’s a win-win situation.
- If interest rates were to start to go up or even skyrocket, your mortgage payment could go up when the adjustable phase kicks in. You could find it difficult to keep up with the higher mortgage payments.
- With an adjustable rate mortgage, you’ll need to plan for when interest rates start changing and in turn your mortgage payments could go up. You can do all the planning in the world, but if you’re not able to sell your home or refinance when you want to, you could be at risk of losing your home.
- Adjustable rate mortgages sometimes come with mortgage penalties. This is a fee you’re required to pay if you sell your home or refinance your mortgage in the middle of its term. If you think there’s a chance you might need to do that, it’s a good idea to choose a lender that allows this.
- Generally speaking, adjustable rate mortgages tend to be more complicated than fixed rate mortgages. If you’re a first-time home buyer, you may be better off sticking with a simpler fixed rate mortgage.