Finances

3 Dangers Of Home Equity Loans

The idea of a home equity loan or line of credit seems like a great idea. After all, you get to tie the payments into your mortgage and since you’re already used to making monthly payments anyway, you feel that adding a little bit more to it wouldn’t be such a bad thing. Now you can take care of that roof or buy new windows and rugs for the house, getting more value out of your house than you presently have. Sounds great, right?

Unfortunately, for most people life isn’t quite that simple. Many find within a few years that the burden isn’t what they were expecting and it can be hard to get out of. Here are 3 things to worry about.

1. You could be approved for way too much money. Remember the first time you got a credit card that approved you for more than $5,000? Remember promising yourself that you would never max that out? How long did it take you to max it out?

The average home equity loan allows you to shoot for anywhere between 50% to 80% of the combined total of what your home is currently appraised for and how much you have left to pay on your home. So, if you owe $50,000 on your home but it’s appraised for $150,000, you could be approved for anywhere between $50,000 to $80,000.

That sounds good until you realize that you now have to pay whatever your normal mortgage is and a separate payment on the home equity as well. Even at a rate of 7% are you ready for large payments like that, especially if you didn’t refinance your home at the same time?

2. In many states, home equity loans are set up with variable interest rates. What this means is that you might start off with a low rate, but it’s always changing based on how the economy is. If you kept up with what caused the housing crisis and saw how many people lost their homes because they couldn’t afford to make payments on suddenly high interest rates then you know what this danger could be.

Suddenly making your regular mortgage payment seems like a great deal. If you’ve spent little on your home equity you’re probably fine, but what if you got one of those large loan amounts and spent a big chunk of it on home improvements, thinking you’d have more time to get the balance down?

3. You could get turned down. I know, you’re thinking so what, at least you don’t have big bills to worry about. Well, it seems credit agencies rank failure to be approved for a home equity loan very high, and it pretty much makes your credit rating and score take a hit. If you were hoping to get a store credit card it’s not happening for awhile, and you’ll have problems even getting a gas credit card.

Lenders have tightened up standards after the financial crises of the previous 4 years so you’d better ask a lot of questions before even considering it if you hope to be approved. However, you also need to know your spending patterns, your limits, and your tolerance for big liabilities.
 

Tax Preparation

Estimating Estimated Quarterly Tax Payments

Something all businesses have to think about is the reality of quarterly estimated tax payments. In essence, this is the government’s way of trying to get you to pay a part of your taxes quarterly based on figuring out how much you believe you’ll owe by the end of the year in total. The IRS has this thing out there that says they can charge an interest rate of around 3% if you are underpaying your taxes quarterly; it’s “around” because they can change the rate each quarter.

That covers the federal taxes, but what if you’re in a state that has an income tax as well? Although the amount will be much lower that you might be requested to make it seems that each state has different rules on whether they’ll penalize you or not and what the rate will be.

If your business income is pretty similar each year, this becomes a fairly easy calculation. All you really have to do is look at what you make the previous year, how much in taxes you had to pay, divide that by 4 and you know how much you should be paying. Nice, clean and simple.

But life isn’t always like that. Consulting businesses, seasonal businesses, and many other home businesses don’t have that kind of regular money coming in. Some are doing very well while other have periods of struggle, sometimes even lasting the entire year. Even if you happen to be incorporated, the normal rules of engagement might not quite fit what your tax liability might be. After all, there are expenses you get to write off that might impede your own ability to know whether you should even have to pay any quarterly taxes. Your accountant can help you if you have major worries about this.

Here are some tips to help you along, with a caveat that you follow these tips at your own risk because there’s no way we can know everything about your particular situation. It’s a place to get started though, based on research and track records, that might help guide you in some fashion.

First, if you believe your tax liability will be less than $1,000 for the year as an individual or $500 for a corporation, you don’t have to think about quarterly taxes at all. You probably won’t have to deal with any taxes at all, but it depends on your expenses and other things associated with your business.

As a point of clarification, this isn’t saying if you make less than $1,000 or $500. You know the withholding booklet you look at after you’ve calculated your income to see how much tax it says you should have paid for the year? It’s all based off that, and after you’ve estimated your expenses. Thus, if you look at the withholding booklet after you’ve done a calculation and your tax liability is under those numbers, you’re probably good.

You need to remember to look at this as if it’s your yearly income if that’s possible, or else you’ll run into the same problem some people have in not making sure they have enough money taken out for state taxes if they work part time jobs. And you have to also remember to base your calculation off your normal tax filing status; the amount if you’re married will be different than if you’re single.

Second, what if you want a quick down-and-dirty figure to go off? Based off research, there are 4 recommendations:

1. If your gross income is more than $10,000 and your state has income taxes, pay at least half of your state’s rate. Therefore, if your state’s income rate is 4%, pay at least 2%. That’s not much overall so if you want to err on the side of caution go ahead and pay a bit more.

2. If your gross income is between $10,000 and $20,000, pay at least 10% in estimated federal taxes. The withholding book for married would show $446.30 plus 15% of any amount over $6,538, so the figures will be close.

3. For any amount between $20,000 and $40,000, start your thinking from 15% and go up from there. Thus, if you believe your yearly gross will end up being $20,000, think of paying at least $3,000, which quarterly would be $750. For every $5,000 increase add 1-2% to your payment. Now, if you believe your liability will be closer to that $20,000 figure you can probably think of lowering your payment some and still get a refund; if it’s closer to the $40,000 be ready to pay more.

4. If your gross income gets to being at least $57,000 a year, that’s when you have serious thoughts on paying more in estimated taxes. At a minimum your income tax liability will be around $12,500, and you’ll want to continue looking at that 1-2% estimated increase per $5,000.

This is just the down and dirty. There are ways to bring your liabilities down that, if you use a tax professional or accountant, can help to save you money on your taxes. If you’re in a business where you might have to deal with estimated tax payments, obtaining the services of a professional is worth the trouble.
 

Accounting

The Difference Between Bookkeeping And Accounting

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To some people, the role of bookkeepers and accountants are pretty much the same. People in both professions can track the way individuals and businesses spend their money. They can both tell you whether you’re in the black or the red. Those are pretty simple functions though. Once you need more than that, an accountant is the way to go.

One thing and accountant can do is tell you about your taxes. An accountant can tell you whether you need to make quarterly payments and how much. An accountant will find ways to minimize your tax liability if possible. It’s possible you can get that from a highly trained bookkeeper, but it would be uncommon.

An accountant can consult you on business purchases and other taxable expenses that you can save on. Bookkeepers might know some of that, but there’s no way they would know as much as an accountant will know since it’s their job to know that. If you needed to spend a particular amount of money to offset your income, an accountant can tell you that. If there are certain trips that you take which you can write off on your taxes, an accountant will know that as well.

This is not to negate bookkeepers by any means. A good bookkeeper can help you figure out how to budget your money so that you can get your bills paid. A good bookkeeper will know how to categorize your spending and your income so that your records are clean when you have to give them to an accountant to do your taxes. There should be a great symbiotic relationship between bookkeepers and accountants, while realizing that an accountant’s skills and knowledge have to go beyond those of a bookkeeper. It’s like the relationship between a doctor and a registered nurse. Registered nurses know a lot about medicine, but doctors have to know more and spend more time learning it.

T. L. Wall Accounting works with both companies and their bookkeepers when it’s tax time. Bookkeepers understand how to keep expenses as well as receipts in a proper format so that accountants don’t have to spend more time than necessary getting taxes completed. Of course it doesn’t hurt having an accounting firm that does your taxes also handle your books, but this decisions should always come down to the comfort level of the consumer.
 

Budgeting

5 Things To Do When You’re Going To Have Problems Paying Your Bills

Everyone has a period where there’s a problem concerning paying bills. It could be for many different reasons but no matter what the reason is, the pressure feels great. A reality most people don’t know is that you always feel worse when you don’t know what to do than once you figure out and start to address the issues. Here are 5 things you need to do along the way towards getting back your peace of mind.

1. Figure out if you’re really in financial distress or not. This involves a word some people think is ugly, budgeting and yet it’s a necessary thing and truthfully not as evil as some people think it is. Trust me, it’s comforting knowing that you have a lot more money than you thought you did if you do it right, and sometimes even if you don’t have as much as you hoped, you find that you have enough to pay everything if you just spend smarter.

2. If you’re close to being in trouble the first thing to do is figure out what you’re allowed to be a little bit behind on. Try to never fall behind on credit card payments because they’ll jack up your interest rate and that adds to your outstanding debt greatly. Services like phone, cable, even your power will often allow you to miss the date of payment and tack on maybe a $15 late fee, and some don’t tack on anything. This is a short term solution if you know you can catch up.

3. You just might have to get rid of some things or reduce other things. Sorry, but comfort just might have to take a minor hit along the way. If you have to turn off or reduce cable for awhile it’s something to think about. Do you really need that big package on your smartphone or regular phone or can you drop something for a short period of time?

4. Pick up the phone and call. Hiding won’t make things go away, but picking up the phone and making a call can help greatly. If you have a car payment sometimes you’ll find out that they give you so many “grace” payments during the course of your loan, which means you’ll get to skip a payment or make a very much reduced payment. Sometimes your credit cards companies will give you a reduced payment rate for a few months as long as you agree not to use the card at all and won’t jack up your interest rate. Many companies in today’s world will accept a one-time smaller payment if you tell them what your situation is. Almost everyone will work with you, but you’ll never know if you don’t try.

5. Don’t panic; get help if you need it. Why are accountants around? Why is there an organization called Consumer Credit Counseling? Why are there other people who can help you with budgeting and planning? Because many people need help with their finances and it doesn’t always get to the point of having to declare bankruptcy. Get help if you need it; if you don’t, then do what you need to do to get out of trouble and regain your peace of mind.
 

Tax Preparation

Are You Taking Enough Money Out For Your Taxes?

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By now most people should be getting their taxes done. If you knew you were getting a refund you’ve probably already done them and received your money back; lucky you.

At the same time, there are a lot of people, probably half the population, that’s either already received or will be getting the biggest shock of their lives when they find out that they actually owe taxes, and not just a small amount. The main culprit? Your part time job.

This isn’t necessarily true in all states by the way, as a few states don’t have income tax. However, in states like New York that not only has a state tax, but a relatively high rate, people are surprised often because there are a few things they don’t know about.

Even though I said the rate is high, that’s only compared to other states. It’s drastically lower than federal rates. Thus, if you don’t make a lot of money, as in full time income, there’s a possibility that your weekly pay might not be high enough for whomever you’re working for to take anything out for state taxes. As it applies to federal taxes, you’ll have something taken out, but very little.

As it applies to state taxes, when it’s time to file you’ll have this lump sum of income showing that no taxes were taken, which means now you’ll have it applied to the lump sum. The amount you owe will probably supersede any full time taxes that were taken out, thus you’ll end up owing taxes of at least a couple hundred dollars if not more, depending on how much your part time job was paying you.

As it applies to federal taxes, the same kind of thing will occur, even if some money has been taken, because of how low it is. Depending on how much you were making per week, your liability could be in the high hundreds or even low thousands; trust me when I say this, because we see it often.

Does this mean you shouldn’t work any part time jobs? We’re not going to go out on that limb. What we will say is that instead of claiming so many more dependents you have your employer take out a lump sum dollar amount for both federal and state taxes. A general recommendation is to have at least $10 taken out of your weekly check for state taxes.

Federal taxes are harder to figure out, so there’s two responses for it. Either have the employer take out $15 on top of whatever they’re already taking or, if you’re also working a full time job, lower the amount of dependents you’re claiming. Many people don’t know that you can claim a negative number of deductions, which takes more money out of your check. If you’re investing the extra bit by claiming more deductions then you could end up ahead. Since most people don’t do this, you might want to explore whether going -1 to -3 can offer you some benefit.

Unless you’re prepared to pay a bit lump sum tax payment, it’s better to err on the side of caution. If you believe you can’t afford even $25 per paycheck coming from your part time job, you might have to reconsider whether it’s beneficial to you in the end, or whether you need a part time job that pays more money.

At least now you know.
 

Accounting & Financial Advice from the Syracuse NY area