The Biggest Tax Mistakes Are Usually The Easiest to Avoid

tax deadlineMost of us send our tax forms off in mid-March, watch our refunds get deposited into our bank accounts and then breathe a sigh of relief that we don’t have to worry about the hot mess that is taxes until the following winter. Believe it or not, though, waiting until the eleventh hour, trying to claim everything that even remotely applies to you and hoping for the best really isn’t the best strategy. In fact it is one of the biggest tax mistakes you can make (and one that is really easy to fix).

The simple fact is that a lot of us make mistakes on our taxes. Those mistakes are, for the most part, really easy to avoid. Here are some of the other major tax mistakes that can lend you in hot water and what you can do to avoid them.

1. Not Keeping Up With Tax Laws

Tax filing season is January-April 15. Tax deciding season is year round. The tax code is constantly being argued over and refined. Keeping tabs on tax laws is important, especially for making sure that those deductions and credits you were counting on are still applicable. A lot of people got caught this past year after buying a bunch of energy efficient appliances and then finding out that they wouldn’t be able to claim those things on their taxes after all.

Keeping tabs on tax rules and codes doesn’t have to be complicated. A simple Google alert will do it. Or you could follow the news on social media via tax professionals’ Twitter feeds (like the Authority Tax Services Twitter feed) or setting up a feed for tax-related trending topics.

2. Avoiding Tax Debts

One of the worst feelings in the world is finding out that you owe money to the IRS—especially if you were counting on a refund. Even if the amount is substantial, the IRS will work with you to come up with a plan to pay off that debt. Remember: the IRS’s primary goal is to get paid. They’d rather take small monthly payments over a couple of years than not get anything from you at all.

Whatever you do, don’t try to hide from your tax debt, says Authority Tax Services expert Vikas Singh. If you can’t afford to pay or paying would result in a financial hardship there are experts out there who can help you navigate the system and maybe even negotiate down the amount that you owe. Running will only increase what you owe and it might even land you in jail.

3. Failing to Pay Estimated Taxes

If you are self employed or run your own business, you have to pay estimated taxes throughout the current year. Then you claim that amount on your annual tax forms. If you over paid, you should get a refund. Most likely you’ll still wind up owing some money to the IRS but trust me when I tell you that it will be far less than you would owe if you tried to just pay off your taxes every year. The penalties for failing to pay your Estimated Taxes are steep.

Even if you are currently paying on a past year’s tax debt, you need to pay your Estimated Taxes. If you can’t afford to pay both, call the IRS and talk to a case worker. They might be able to reduce your debt payments or put your debt payments on hold for a couple of months.

These are just three of the biggest and most easily avoided tax mistakes that people make. Did we leave anything out? Let us know!

Photo credit: Tax Day Image

Where to Spend Your Hard Earned Tax Refund

If you received a tax refund this year, think twice before celebrating. A tax refund is not a year-end gift from the government. If anything it is a reminder to double check your W-4 and revisit your withholdings. Any money that you receive in the form of a refund is money that could have been invested or working for you in some other way. Instead, you loaned it to Uncle Sam at a nice zero percent interest rate. When it comes to tax refunds, coming as close to possible to netting out is the ideal circumstance. In the case that you do receive a refund however, there are several ways that you can use it in order to return the most value to you.

1. Pay Off Debt

Whittling down your pile of debt is often times a task that can seem to provide no value or return. This is especially the case when you can only afford to make small payments and the balance is slowly reduced month after month. Throwing your tax refund at debt is an immediate solution for significantly reducing debt as well as reducing the amount of interest you pay each month.

2. Establish an Emergency Fund

Saving for emergencies or misfortune is never something that is fun to plan for. Regardless, being prepared for such events can often save an individual from financial disaster. Not only that, but knowing that you are financially prepared for most events provides peace of mind which is oftentimes more valuable than anything that money can buy. It is recommended to have at least three months of expenses saved, but some financial gurus would go as far as to say that six months to a year should be on standby for rainy days. Using some form of personal financial software package can make this process much easier. Depending on your personal situation, there are several routes you can take when planning for emergencies.

3. Save for Retirement

With all of life’s other expenses and goals, something as far in the future as retirement can be pushed aside for present day goals. It is already the case that the average American is not saving enough for retirement. Is is never too late to start, nor is it ever too early. Any time extra cash is available it should be socked away into retirement so that it can grow with time. Using an entire refund is a great way to catch up or add to your already established nest egg.

4. Refinance Your Home

There is no better time than now to take advantage of the all time low mortgage rates. If you are thinking of buying a home, or already own one, locking in a low interest rate is a sure fire way to save money in both the short and long term. A refund can be used towards closing costs and fees in order to make the immediate expense of buying or refinancing more bearable.

5. Give to Charity

Sometimes the most return that you can get for a dollar is not mathematically measurable. Giving to a charity of your choice can be more rewarding than any dividend payment could be. The tax advantages that come with donations are an added benefit.

Treating every dollar that comes into your possession with the same amount of consideration in how it can add value to your life is a skill that comes with patience and determination. Putting off a big ticket purchase for a week is usually all it takes to realize that your money can be better spent elsewhere. Regardless of how your refund ends up being used, it is important to use it in a way that will provide you with the most valuable return.

What to do Wednesday in Personal Finance? Is the Adjustable Rate Mortgage becoming extinct?

Monopoly, interest rate, interest rates, adjustable rate mortgage, arm, fixed rate mortgage, vha

I was reading an article last week that made the motion that adjustable rate mortgages (ARM) are dying.  For starters, adjustable rate mortgages are loans where the interest rate changes periodically.  Generally they are a good option when you are buying a house and the prevailing fixed rate mortgages rates are high.

This notion did not surprise me because interest rates are at historic lows for fixed rate mortgages.  You would be silly not to lock in a mortgage at these rates now, the interest rates are likely not going to get any lower than they are in your life time.  Listen they are at rock bottom now, I was having a water cooler discussion at work just looking for a consensus with my older  wiser co workers to see if they had ever seen or remember rates this low and none of them could! 

What do you think?  Do you have an ARM?  What was your reasoning for going with an ARM vs a fixed rate? 

Well my wife and I have a fixed rate loan.  We thought a few years ago that we had to lock in quick on our rate which is 5.00%, so we locked in at the onset of going through the process to secure the mortgage.  Little did we know that rates would continue to plummet!  Right now rates on a 30 year fixed rate mortgage are around 3.86% according to Bankrate.com.   

According to the Valentine’s Day press release from Freddie Mac, 95% of refinances were to fixed rate loans.  Historically, the ARM loans were great for people looking to have low fixed interest payments at the beginning of the loan then the variable afterward.  Why the great exodus from adjustable rate mortgages? 

Present fixed rate mortgages offer historically low interest rates.  You can lock into a 15 or 20 year loan at payment close to that of a 30 year in the past.  Rates on 15 and 20 year fixed rate loans have generally are a fraction of a percentage point lower in interest as well for the shorter term.  Homeowner fear of rising interest rates has caused a surge in refinance activity in the recent months.  Rates cannot go below 0% and 3.86% is pretty darn close to that, so why not a fixed rate? 

Just my two cents on the fixed rate mortgages, I do not think you will in the near future see lower rates than we are currently seeing today.  The Federal Reserve and Ben Bernanke do not see any interest rate increases in the foreseeable future. 

Get out there and get it refinanced or that dream house you were talking about!  But remember to fit it into your budget and make sure that you will indeed break even in your refinance. 

 

PHOTO BY: woodleywonderworks

Part 1 of the Retirement Roundtable: What is a 401k, and why is it all over this material HR gave me?

We just graduated college and just got our first real job.  Great! Congratulations! Now what?  As we make our way through our first few weeks on the new job we are bombarded with emails, packets of information on everything under the sun from employee discounts to the dreaded RETIREMENT word, eeek.  Well you stumbled across the right website to point you in the right direction.  I will have you sipping those dirty martinis out at the beach house enjoying the afternoon rays.

You are set up at your desk and looking around at the mountain of paperwork that HR has given you.  I need you to look through everything for the packet that says 401k!  Great you found it.  Take a deep breath I know it looks foreign at this point.  I know you are thinking how will I ever understand the material that says take this percentage of that and this percentage of my pretax income gets contributed here and my employer will contribute this much up to a certain percentage.

What exactly is a 401k?   A 401k is an employer sponsored savings plan that is set aside for you in an investment vehicle meant to appreciate over time to save for retirement.  The funding of the 401k is done with pretax dollars, which means that it is not taxed until you receive the distributions.

Why invest in a 401k, why can’t I just put my money in the bank?  The money set aside in your 401k is pretax which lowers your overall pay now and reduces your tax liability.  This is helpful because if you were to just set money aside in a bank,  you would still have to report 100% of that income when it came time to visit the accountant or sit down with your tax software and figure what to pay. Also, with most plans there is an employer match; the employer matches up to a certain percent of your salary that you contribute.  The most popular employer contribution match is 3%

How much should I contribute?  Simple, as much as you can afford to go without.  You will reap the rewards when you are set to retire, and you see all your friends who didn’t read this blog struggling.  If you are not able to set aside a large portion, atleast set aside enough to get the matching portion that your employer gives.  It is free money from your employer, so why not get free money to save for retirement which you have to do anyways.

How does matching work?  Assume you make $40,000 and your employer matches 4% and you wish to contribute 4%.  You would contribute $1,600 to your 401k and your employer would contribute an additional $1,600, which is the match.  The company will not contribute more than this for the year.

Now that you made it through your 401k material, we will tackle another retirement topic at another time.  How much did you decide to put aside for retirement?  How much does your employer match?  Is there another topic that you would like to see covered that you came across in your HR paperwork?

PHOTO BY: cdresz

Week Dos Recap – I am fluent in Spanish, not really…

Wow a whole 2 weeks into personal finance blogging and I have to say I love doing it.  It has been a great journey thus far.  I am building some great friendships with the personal finance blogging community.  I have found the Yakezie Network great and everyone is very willing to help out. 

I learned that with blogging or your spouse you have to give love to receive love.  I am out there sharing the love as much as I can with my fellow bloggers.  Here is it close to midnight preparing the post after a long day of blogging and financial analysis at work.  I am not complaining, just stating that loving takes time. 

Here are some of the sites/post that I found quite interesting this week, as always they are in no particular order. 

If you just are looking for an all-around laugh this site is great to check out Punch Debt in the Face.

I have little sticky notes all over the place and a pocket full of folded up pieces of paper with various notes and ideas for blog posts.  Evernote is a great program that I saw that Thad at ThadThoughts gave a great review on.  Now I have it installed on my Razr and I love it! 

Here’s a site established a little before mine making similar progress to mine.  Very great read over here be sure to check him out.  Here is his reflection on this first few weeks of blogging, take a look at Modest Money.

Here are some frugal Valentine’s Day Ideas, they may be a little late now but heck they are even more frugal. Interesting read for the week.  Check it out here at the College Investor!

Here is an Article on preparing for your accountant at the end of the year.  Very thorough and well written piece by My Journey To Millions

Have a safe weekend and we will be back on Monday to share the great work week together!  Time is flying now a few months till the big 3-0, eek I am old!  Make sure to give these blogs some love and tell them Christopher sent ya!

-Christopher-

I’m a baller – I own rental furnished apartment properties

Well I am not new to the rental property thing but I will tell you how it all started.  It all started a few years ago about rental properties when we were looking to move out of our furnished apartment for rental because our landlord was driving us crazy.  We were aggressively scouring Craigslist to find an apartment.  Well we found an apartment, ground level which means no stairs!

We decided to grab it as soon as we saw it; we definitely thought the rent was well below market value.  Come to find out the gentleman was getting ready to put the house on the market and was just trying to get it rented to cover his carrying costs until he could sell the house.  The house is a 2 family house upstairs and down.

About a week after we moved in the house was on the market.  We casually discussed purchasing the house and I didn’t really think I would be purchasing a house this quickly.  A month and a half later after all the paperwork and legalities, I was handed the keys to my first house.  Still in the whirlwind of the purchase, I quickly listed the rental property on Craigslist to try and rent out the upper unit.

After a few showings of the rental property and being in the middle of the winter months we didn’t know what to do.  So we found a few college guys, don’t pass judgment on college guys these 2 were very respectful and great tenants!

We had previously rented units but didn’t really have a contract, I wanted to come off as official and make sure I followed all the rules and regulations.   All of our previous contracts for rentals were either handshake deals or poorly written contracts.

I did a little research and found a few companies out there that write contracts specific to the state of New York. There is a little more about me! I decided to purchase a template to which I could edit.  It was very well written, I just filled out some of the information that pertained to the rental and I was ready to go.

Since the house is an older house we had to notify the tenants that there was the potential for lead paint in the unit.  I warned them not to gnaw on any of the window sills for fear of lead poisoning.   I had to give them a lead pamphlet and have them initial a form acknowledging that they know of the potential of lead based paint.

The guys stayed a little less than a year, but to get the apartment rented in the winter during a tough time of the year we were not too specific on the length of the contract.  After their tenure in our apartment a single female moved in and she is now in the process of moving out.  So as we speak, I am getting emails daily for potential tenants to rent.  Sure I am a pretty good judge of character, but I love the internet because you can find just about anything on anyone!

Life can turn upside-down very quickly and you find out you’re a homeowner and landlord in a matter of moments.  As a single family household the rental allowed for Mrs. MBA to stay at home with our little one!

We will discuss another time on how we derived a fair market value to rent the unit for.

Anyone else own rental property, if so how have you coped with tenant turnover? We are trying to find a tenant that will stay for a decent duration, but as long as it is rented we are happy.  Now that the Mrs. is working this will be a nice supplemental income.  Did I mention that the rental unit covers our mortgage plus some of the escrow!

What are your thoughts on owning rental property? More hassle than they are worth?  I would like to purchase more as a means of additional income for our family.

PHOTO BY: hownowdesign