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.
Exploring the Different Types of Mortgage Loans
For most people, purchasing a home means taking out a mortgage loan (unless you belong to the 16 to 23% of Americans who purchase a house with cash payment). A mortgage is simply a loan taken to purchase a real estate property.
Mortgage loans are more commonly drawn to purchase a house, and this loan is in turn secured on the value of the house.
While the definition of a loan may seem straightforward, there are actually many different types of mortgage loans to consider, and the application process requires some level of expertise and lots of documentation.
Things to Consider Before You Get a Mortgage
You can get a pre-approval or pre-qualification from banks or a broker to determine the value of real estate property you may be able to qualify for. To verify if you qualify for a mortgage loan, your financial status would be assessed.
The mortgage lender would assess information on your credit history, credit score, employment status and income, as well as any other existing financial obligations to determine the limit of mortgage approval.
Total Housing Expenses
While a bank may give you a pre-approved value for a house purchase, you also need to consider your total housing related expenses in proportion to your income. Housing expenses consist of more than just mortgage payments; you would incur expenses for insurance, legal fees, homeowner’s association or condo fees (if required), maintenance fees, taxes, etc.
There is no rigid rule, however, it is generally advised to keep all housing related expenses within a range of 30-35% of your combined household gross income. Make sure to also get your credit score in order as this influences a final mortgage approval decision.
You also need to take into consideration any required cash down payments towards your mortgage or decide on making use of the private mortgage insurance (PMI) if making down payments less than 20% of the total property value.
A major part of mortgage financial obligations is the mortgage interest rate, this alongside other factors would determine how much you pay towards your mortgage periodically. You need to research ongoing rates and consider using the services of a broker to get different mortgage rate offers that best suits your needs.
The Application Process
One thing a mortgage application means is paperwork, paperwork and more paperwork. You need to provide a lot of information for the mortgage application process, including documents that confirm your identity, status and ability to pay back a mortgage loan.
After you get a mortgage pre-approval and decide on a home to purchase within the pre-approved value, the next step is the mortgage application. The different financial institutions that provide mortgage loans are traditional banks, private lenders and brokers. The documents and information required by these institutions are similar but may vary across different organizations and states.
Some of the important documents required for a mortgage application include:
- Personal identification
- Employment verification
- Loan application form
- Financial assets and debts statements
- Paycheck stubs from last 30 days
- W2 or I-9 forms from past two years
- Other required tax information
- Bank accounts
- Signed construction or purchase agreement
- Property information
This list is not exclusive and may vary by application. The lender assesses all documentation provided and may request additional information if required before your mortgage is approved and you proceed to close on a property.
The Different Types of Mortgage Loans
There are different types of mortgage loans that cater to various needs. Some of the most common mortgage loans are discussed below.
Conforming Mortgage Loan vs Non-conforming Mortgage Loan
Conforming mortgage loans are loans that meet the Federal Housing Finance Agency (FHFA) and Fannie Mae or Freddie Mac (Government-backed mortgage agencies) guidelines. These federal sponsored agencies set the conforming loan limits for mortgage loans. The conforming loan limit for 2020 for a one-unit in most locations was set at $510, 400, while some locations have a higher limit of $765,600.
Pros of Conforming Mortgage Loans
- May offer lower interest rates
- May be easier to qualify
- Can require lower down payment
Cons of Conforming Mortgage Loans
- May require Private Mortgage Insurance (PMI) due to lower down payment (less than 20%)
- Requires adherence to strict FHFA limits and guidelines
Non-conforming mortgage loans on the other hand do not conform to the limits set by the Federal Housing Finance Agency. The most common non-conforming mortgage loan type is the Jumbo mortgage. Jumbo mortgage loans are usually of a higher value and carry higher risks for the lender, thus leading to higher interest rates. This type of mortgage loan cannot be purchased by Fannie Mae or Freddie Mac as they are restricted by law to purchasing homes below the conforming loan limit.
Pros of Non-Conforming Mortgage Loans
- May require less documentation
- Can be more flexible to your mortgage needs
Cons of Non-Conforming Mortgage Loans
- May require higher interest rates
- Usually require exceptional credit scores
- Can demand higher down payment percentage
Fixed Rate Mortgage vs Adjustable Rate Mortgage
A Fixed Rate Mortgage guarantees a fixed interest rate for the period of your mortgage as specified in the loan agreement. Mortgage interest payments remain constant regardless of changes in the financial market.
Pros of Fixed Rate Mortgages
- A fixed rate allows for planning and budgeting
- If market rates rise unexpectedly, mortgage interest rates remain constant
Cons of Fixed Rate Mortgages
- May not be able to take advantage of lower interest rates
- Interest rates offered may be higher
Adjustable Rate Mortgages have interest rates pegged to an underlying financial index, usually the market interest rates. This means that mortgage rates could change and fluctuate (rise or fall) depending on the direction of the index rate.
A hybrid form of mortgage loan may require fixed rates and payments in the first few years of the mortgage loan, after which it changes periodically. An example is the 5/1 adjustable rate mortgage (5/1 ARM) with fixed rates for the first five years, after which it changes every year subsequently.
Pros of Adjustable Rate Mortgages
- Initial rates may be relatively lower
- May be able to take advantage of lower future rates
Cons of Adjustable Rate Mortgages
- Higher future rates may cause an increase in mortgage payments
- Inconsistent and fluctuating rates make it harder to plan and budget for expenses
Government-Insured Mortgage Loans
There are three government-backed mortgage loans: The Federal Housing Administration (FHA) loans, the U.S. Department of Veterans Affairs (VA) loans and the United States Department of Agriculture (USDA) loans.
The FHA loan program is managed by the FHA, part of the Department of Housing and Urban Development (HUD). This loan program is advantageous for people who do not have large down payments or excellent credit scores. It allows for down payments as low as 3.5%. The FHA are not the lenders but insure and regulate these loans. The maximum amount for these loans varies by location.
The VA loan program caters to members of the U.S military, veterans and their family members. The government insures these loans and borrowers are not required to make down payments.
The USDA loan program managed by the Rural Housing Service (RHS) provides mortgage opportunities for low to moderate income rural residents who do not readily qualify for other conventional mortgage loans.
Pros of Government Insured Mortgage Loans
- Offers lower or no down payment requirements
- An option for people with lower credit scores
- Suitable for low income earners or first-time home buyers
Cons of Government Insured Mortgage Loans
- May be subject to maximum loan amount limits
- May require additional documentation to prove eligibility
- Can result in higher interest rates