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.
Understanding the Process and Regulations of a Private Money Lender
A private money lender offers loans to businesses or individuals, and they typically finance real estate. Unlike banks and credit unions, private money lenders do not use credit as the primary determining factor for loan approval.
While the lender may have a minimum required credit score, they emphasize the loan terms, the value of the collateral and whether you have invested some of your own money in your project.
Types of Private Money Lenders
Like any other type of loan, you can choose the private money lender that best meets your needs. It's crucial to shop around for the best terms, even if you have credit challenges or have been denied by private money lenders in the past.
Private lending companies like Lightstream, Best Egg, or Lending Point are online lenders with different loan requirements than a bank or credit union. You can also get a private money loan from individual private lenders. These accredited investors may be more concerned with the loan terms and the investment quality than the borrower's credit history.
Borrowers can also reach out to professional contacts and family and friends to get a private money loan. Their relationship with you and first-hand knowledge of your situation may help you get the loan you need if you cannot get conventional financing.
Pros and Cons of Private Money Lending
Before choosing a private money loan, it is crucial to understand how this type of financing works.
High APR and Fees
A private money loan can be expensive. Expect to pay interest rates that are far above today's low APRs. Look through the fine print carefully. Many hard money loans come with origination fees of 1% to 5% of the total loan amount and annual fees of up to 13% of the total loan amount. Some lenders also require you to pay a commitment fee to reserve your loan funds until closing. Be sure to ask about pre-payment penalties or interest lockouts that guarantee the lender a certain amount of interest, even if you pay off the loan early.
The loan term is usually just one to five years. Most borrowers require only a short-term loan to help them with a real estate investment, so a higher interest rate combined with a smaller term works well.
Low Loan-to-Value Ratio
Hard money loan approval depends on the value of the collateral. A lender may finance the investment up to its market value, but they usually prefer a 50% to 75% loan-to-value ratio. With a low loan-to-value ratio, the lender can justify the increased risk that you will default on the loan. They can recoup their money by selling the property if you do not make payments.
Quick Approval and Funding
While it can take months to get approved for a traditional mortgage or business loan, the turnaround time on a private money loan could be as short as five days.
Relaxed Credit Requirements
Your private money lender may be more concerned with the value of the property you use as collateral than your credit history. So, if you cannot qualify for a mortgage or business loan, this type of loan can provide the cash you need to fund your real estate project.
How To Get a Hard Money or Private Money Loan
If you need a private money loan for a real estate investment, it is smart to reach out to local real estate developers to get the names of investors who may be interested in your project.
For private money loans for debt consolidation or other personal reasons, you may have more luck finding a hard money loan from an online lender. The lender may require a detailed real estate appraisal or valuation for the loan's collateral. While their final decision probably will not hinge on your creditworthiness, some lenders have a minimum credit score requirement.
The underwriting process varies from one lender to the next. If you choose an online lender, expect to provide details about your financial situation like debts, income, and assets. If you need a fast loan to rehab a piece of real estate, the lender may require a purchase contract for the property and a written scope of work, including costs and timing with your completed loan application.
For a new construction loan, your lender may ask you to work with your contractor to set up a draw schedule. The lender may not release all the funds at once. The draw schedule gives an estimate of how much money you will need throughout the project.
Who’s Most Suitable for a Private Loan?
A private money loan is not right for everyone with bad credit. There are other ways to borrow money for real estate. If you have credit problems and plan to live in the home, consider an FHA loan. If your property is in disrepair, an FHA 203k loan may work, as well.
Private money loans work best for real estate experts with a project that could potentially make enough money to pay off the loan plus the fees in a short amount of time.