Income Tax: What Is It and How Does It Work?

Income Tax: What Is It and How Does It Work?

Every year by April 15, give or take a day, most Americans file their tax returns. Income tax is exactly what it sounds like: Individuals and companies are typically required to pay taxes on their income, or the earnings and profits made during the previous year.

Figuring out the right amount to pay can take some time. When you or your tax preparer fills out your tax forms, you’ll find out if you’ve overpaid your taxes, meaning you’re entitled to a refund, or if you’ve underpaid, which means you’ll owe money to the government.

There are different types of income tax, but the one most people have to file is federal, which is done through the Internal Revenue Service (IRS), a bureau within the U.S. Treasury Department. Depending on where you live, you may also have to pay state or local income taxes as well.

Filing taxes can be confusing and complicated, but read on for a guide that will clarify:

•   What is income tax?

•   What are the different kinds of income tax?

•   How do you know how much you owe in income taxes?

•   How can you lower your taxable income?

What Are Income Taxes?

Income taxes are taxes that are collected by the government on income (aka money) earned by individuals and businesses. This can include salaries, tips, commissions, bonuses, investment income, interest earned, and other sources. Also know that what is an income tax can be assessed by a federal, state, and/or local government Some Americans may only pay federal taxes; others may be liable for those at a federal, state, and local level.

What are income taxes used for once they are collected? Taxes are typically earmarked to pay for public services, provide goods for citizens, and also go toward government needs. Infrastructure is a common use; that means things like building roads, improving education, and the like.

Income taxes may be collected at the federal, state, and local level, depending on where you live.

How Does Income Tax Work?

The amount of income tax you pay depends on how much money you’ve earned in the past year as well as other factors, such as whether you are single or the head of household. First, a bit more about what counts as taxable money:

•   Income that’s taxable includes your earnings from work, rental properties, or money made from stock investments.

•   Certain forms of income that are deemed nontaxable and may not have to be reported on your tax return. Some examples of nontaxable income are child support payments , financial gifts, alimony, and employer-provided health insurance.

The U.S. tax system is progressive, which means the greater your income, the higher your tax rate. The idea behind a progressive system is that people who earn more are able to pay more in taxes. So, depending where you fall income-wise, you’ll be taxed at a different rate.

Currently, there are seven tax brackets, ranging from 10% to 37%. Each bracket corresponds to specific income thresholds and are adjusted each year for inflation.

Tax season revolves around filing Income tax returns each spring. Some details:

•   The typical deadline is April 15, though if that date falls on a weekend or holiday, the date will be moved to the next business day.

•   Those who are self-employed may pay quarterly estimated taxes.

•   You must file your federal income tax return with the IRS, by mail or electronically. In order to file, you must have all the necessary year-end income documents, including those from your employers and financial institutions.

•   The IRS recommends taxpayers file electronically, since it can take six months or more to process a paper return. Electronic files move much more quickly through the system.

When you fill out your tax return and file it with the IRS, you’ll find out if you’ve underpaid and still owe any taxes or if you’ve paid too much and are entitled to a refund. Salaried workers file an IRS Form W-4 with their employer spelling out their tax withholding, or allowances. This indicates how much to set aside from a paycheck for taxes. This number can be changed to help compensate for too much or too little taxes paid out during the previous year.

Quick Money Tip: Direct deposit is the fastest way to get an IRS tax refund. More than 9 out of 10 refunds are issued in less than 21 days using this free service, plus you can track the payment and even split the funds into different bank accounts.

Brief History of How Income Taxes Came to Be

Now that you know what income tax is, here’s a quick look at how it came into being in America. The first federal income tax came about in 1861, as a way to finance the Civil War effort. A year later, Congress passed the Internal Revenue Act which created the Bureau of Internal Revenue, which eventually evolved into today’s IRS. But income tax didn’t have the substantial support after the Civil War and was repealed in 1872.

Federal income tax made a short comeback in 1894, but the next year it was ruled unconstitutional by the Supreme Court. This verdict was based on the grounds it was a direct tax and not apportioned among the states on the basis of population.

In 1909, the 16th amendment to the Constitution was introduced, which would give the government the power to collect taxes without allocating the burden among the states in line with population. It was passed by Congress then, but it still needed to be ratified by 36 states. Ratification of the 16th amendment finally happened in 1913, giving Congress the legal right to impose a federal income tax. This laid the foundation for the tax system as it’s known today.

What Are the Different Types of Income Taxes?

There are three basic types of taxes: taxes on what you buy, taxes on what you own, and taxes on what you earn. Under the umbrella of the latter, or earned income, there’s individual or personal income tax, business income tax, and state and local income taxes. Here’s the differences between them:

•   Individual or personal income tax. This type of tax is imposed on salaries, wages, investments, or any other forms of taxable income a person or household earns. Thanks to deductions, tax credits, and exemptions, most people don’t end up paying taxes on all their income.

•   Business or corporate income tax. This kind of tax is based on business profits, minus the costs involved in doing business. According to the IRS, all businesses except partnerships must file an annual income tax return.

•   State and local income tax. Depending on where you live and work, you may have to pay state and local taxes. Currently, nine states (Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington, Wyoming, and New Hampshire) don’t have a state income tax. Some local governments impose a local income tax on people who live or work in a specific city, town, county, municipality, or school district. Both state and local taxes help pay for a wide range of services like roads, schools , and law enforcement. State and local taxes are generally much lower than federal income tax.

Quick Money Tip: Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. An online bank account is more likely than brick-and-mortar to offer you the best rates.

How Do I Know How Much I Owe in Income Taxes?

In order to figure out how much income tax you may owe, here are some steps:

•   You’ll want to know your filing status which will determine which tax bracket you fall under. The five filing status choices are single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child.

•   Once you know how you’re going to file, you’ll need to gather up all your documents detailing your earned income, such as your W-2 and 1099 statements. When you have all of the information about how much money you earned, you can total it up, which amounts to your gross income.

•   The next step in knowing how much you owe in taxes is to calculate your adjusted gross income (AGI). You can do this by taking your total gross income from the year and subtracting any “above the line” adjustments, as they’re known, that you are eligible for. A list of adjustments to income can be found on the Schedule 1, 1040 IRS form and include deductions such as educator expenses, self-employment tax, and student loan interest payments.

Once you’ve got your AGI number, you can then subtract any standard or itemized deductions to get your taxable income amount. Itemized deductions can include charitable donations, paid mortgage interest, property taxes, and unreimbursed medical and dental expenses . An alternative to itemized deductions is the standard deduction option. A standard deduction is a set dollar amount based on your filing status. When you have your taxable income number, you can then pinpoint your tax bracket and determine your tax rate.

Recommended: What Are the Common Types of Payroll Deductions?

Ways to Lower Your Taxable Income

You can reduce your taxable income by taking advantage of any pre-tax savings opportunities available to you. Consider these tips:

•   Take advantage of employer-sponsored retirement plans. Contributions to a 401(k) for example, are made before tax. This removes the contribution amount from your taxable income and can thereby lower the amount of taxes you’ll have to pay for the year. You can also take an individual retirement account (IRA) deduction if you contribute, which can also lower taxes owed.

•   Enroll in a health spending account (HSA) or flexible spending account (FSA) if your company offers them. A health savings account allows pretax contributions to be used for upcoming healthcare costs for employees with high-deductible health insurance plans. If your employer doesn’t offer one, you can open a HSA on your own.

   With a flexible spending account, you’ll need to sign up through your employer. Similar to an HSA, you would make a pretax contribution, but a FSA covers medical and dependent expenses like childcare.

•   Figure out what tax deductions you can claim when you file your return. As previously noted, when it comes to deductions, Uncle Sam allows you to write off a number of expenses, including real estate taxes, certain casualty or theft losses, and donations made to a charitable organization. People who are self-employed can deduct such costs as office supplies, phone and internet costs, and any travel expenses related to work. These deductions can help save you hundreds or even thousands of dollars on your tax bill.

•   Check that your tax withholding is appropriate. As noted above, check your W-4 form, the one you fill out for your employer to let them know how much tax to take out. It may need to be adjusted if you owe a considerable amount of money in April. On the flip side, if you have too much withheld and get a significant refund, you’re basically giving the government an interest-free loan throughout the year. To be sure you’re paying the right amount, be sure your W-4 form is updated if you have a major life change, such as the birth of a child, marriage, divorce, or a significant pay raise.

Recommended: 7 Steps to Prepare for Tax Season

Tips for Filing Income Taxes Correctly

Avoiding mistakes when filing your tax return can help prevent you from missing out on a bigger refund than you claimed, owing more taxes, or triggering a tax audit by the IRS.

Here are some suggestions on how to fill out your tax return when filing whether you’ve done it before or are doing your taxes for the first time:

•   Gather all of your pertinent paperwork and make sure you’re not missing tax forms. You’ll need a W-2 form from each employer, other earning and interest statements, and receipts for any expenses you’re itemizing on your return. Any income and investment interest forms should be mailed or sent electronically to you in January. If you haven’t received them in the mail, you can find and download many of these documents online through your bank, mortgage provider, or payroll company. If you still haven’t received your tax statements or can’t find them online, call the necessary people to get your documents as soon as possible.

•   When filling out your return, make sure your basic information is accurate, such as your name, Social Security number, and filing status. The IRS will also be double-checking your numbers against your tax statement documentation.

•   Take care when disclosing your earned income. Report your financial information exactly as it’s reported to the IRS on forms such as your W-2 and 1099.

•   Sign your tax return. According to the IRS, an unsigned tax return is invalid. If you’re married and filing jointly, in most cases both spouses must sign the form. Filing electronically can help taxpayers avoid submitting an unsigned form by using a digital signature.

•   Consider using a tax preparation software program or having a professional tax preparer do your return. Online software is often fairly straightforward if your situation is pretty simple. However, if your tax return is more involved and complicated, it may be worth it to hire a tax professional. An experienced tax preparer can help ensure your tax return will be filed correctly and on time.

•   Try not to put off filing your taxes until the last minute or you run the risk of missing the tax filing deadline.

•   You can file for a tax extension of six months, but know that any taxes owed are still due on time; it’s the return that can be filed later.

Recommended: 11 Red Flags that Can Trigger a Tax Audit

The Takeaway

Income taxes are a way for the government to collect revenue from citizens and businesses. Besides paying federal income taxes, you may need to also pay state and local taxes. There are ways to lower your taxable income, and doing so can result in paying less when the bill comes due or a bigger refund. Knowing how to file correctly and on time can help prevent any delays in reimbursement checks, late fees, or penalties.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Can I lower my income taxes?

Yes, there are several ways you can lower your taxable income. Participating in employer-supported programs (such as pre-tax contributions to a 401(k), FSA, and/or HSA), taking deductions, and choosing the right filing status are all ways you can help reduce your income taxes.

How can I determine how much income tax I’m required to pay?

You can start by estimating your taxable income. This involves taking your adjusted gross income, or AGI. which is the total amount you report that’s subject to income tax; typically, it’s earnings such as wages, dividends, and interest from a bank account, for example. Then you would subtract any tax deductions or eligible adjustments from that amount. What’s left is taxable income. You would then calculate the appropriate tax bracket percentage based on your income and filing status to figure out your tax liability.

Does income tax improve your money management?

It can. Being organized with your taxes can prevent you from owing a large sum come Tax Day, missing the filing deadline, and potentially paying any interest and late filing penalties to the IRS. If you’re self-employed, putting aside taxes from your earnings and paying your taxes quarterly can also help prevent a potentially large tax bill. And, of course, getting a hefty tax refund can go towards savings, investments, or paying down debt.


Photo credit: iStock/Charday Penn

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Homeownership and the Race Gap

Examining the Race Gap in Homeownership

Despite the Fair Housing Act of 1968 and other federal laws, a large race gap in homeownership continues to exist across the United States. The Black homeownership rate in the fourth quarter of 2022 stood at 44.9%, compared with 74.5% for non-Hispanic whites, according to the U.S. Census Bureau.

The Black-white race gap in homeownership rates widened as the Federal Reserve attempted to bring inflation under control — going from 29.3 percentage points in the first quarter of 2022 to 29.6 percentage points in Q4. Average mortgage interest rates generally increased in 2022 after the Fed implemented a series of rate hikes.

These racial disparities are not new. Historical records confirm a large race gap in homeownership rates has existed since the abolition of slavery. Below we further examine the race gap in homeownership and identify possible solutions.

History of Racial Housing Disparities

The United States has a long history of systemic racism that presents itself in a number of ways, including housing disparities. In January 2022, the National Community Reinvestment Coalition released its home mortgage report examining racial disparities in homeownership from 1900 to 2020.

The NCRC found the gap in homeownership rates between Black and white families reached its lowest level of 23 percentage points in 1980 and its highest level of 30 percentage points in 2015.

In the fourth quarter of 2021, the Black-white race gap in homeownership rates exceeded 31 percentage points. This gap narrowed to 29.6 percentage points in the fourth quarter of 2022, according to data released by the U.S. Census Bureau.

The homeownership rate as of Q4 2022 stood at 74.5% for non-Hispanic white households; 61.9% for Asian, Native Hawaiian, and Pacific Islander families; 48.5% for Hispanic families of any race; and 44.9% among Black households, according to the Census data.

A number of factors have contributed to the race gap in homeownership, including the legacy of race-based discrimination in the housing market.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.


Lasting Effects of Redlining

Redlining, the discriminatory practice of denying home loans and other credit services to ethnically diverse neighborhoods based on the race, color, or national origin of the residents of those neighborhoods, is one of the factors explaining America’s long-standing race gap in homeownership.

The federal government institutionalized redlining in the 1930s when a now-defunct federal agency, the Home Owners’ Loan Corp., created “residential security maps” in dozens of cities across the country to systematically deny mortgages in neighborhoods of color.

HOLC ceased to exist in 1951, and Congress later outlawed redlining with the Fair Housing Act of 1968, but lending discrimination in the housing market has persisted.

An article published in the journal SSM-Population Health in June 2021 found that “redlining has continued to influence racialized perceptions of neighborhood value and practices that have perpetuated racial inequities in lending.”

“Decades of racism in the housing market,” the article adds, “have prevented people of color, particularly Black Americans, equal access to capital, low-cost loans, and homeownership.”

The Department of Justice continues to enforce the Fair Housing Act to address ongoing allegations of modern-day redlining.

Current Black Homeownership Gap

As mentioned, the current race gap in homeownership rates between Black and white families is 29.6 percentage points as of Q4 2022. The vast majority of white families own residential property, while the majority of Black families do not, data shows.

Homeownership is often regarded as the American dream, but not everyone who wants to buy a house is able to get financing. The overall denial rate for home-purchase loans among all applicants in 2021 stood at 8.3%, according to the Consumer Financial Protection Bureau.

Bureau data shows that 15.3% of Black applicants had their mortgage loan requests denied in 2021, compared with 6.3% of non-Hispanic white applicants.

This first-time homebuyer guide recommends downloading your credit reports before submitting any applications for home loans. Creditworthy applicants who have home loan applications denied may be victims of discrimination. You can get free credit reports at AnnualCreditReport.com and can check your credit scores in several ways.

Homeownership by Race

The below table highlights homeownership data by race as of Q4 2022

Race Homeownership rate
Non-Hispanic white alone 74.5%
Asian, Native Hawaiian, and Pacific Islander 61.9%
Hispanic (of any race) 48.5%
Black alone 44.9%
Other (including mixed races) 58.7%
All (nationwide population) 65.9%

Homeownership Race Gap 1940-2020

Fixing the Black Homeownership Gap

The Urban Institute, a nonprofit research organization, has a five-point framework aimed at reducing the Black homeownership gap. Here are the five points:

1. Advance Local Policy Solutions

Local policy reforms, including the removal of any discriminatory terms in homeowner and condominium associations and possible property tax relief for low-income and moderate-income taxpayers, can help reduce the Black homeownership gap.

Expanding small-dollar mortgages could also make a difference.

2. Tackle Housing Supply Constraints and Affordability

Promoting affordable housing nationwide, including new investments in historically segregated and devalued neighborhoods, may help reduce the Black homeownership gap.

Public policy leaders could also review the viability of lease-to-own programs as a pathway to homeownership.

3. Promote an Equitable and Accessible Housing Finance System

Greater access to down payment assistance programs for economically disadvantaged consumers may reduce the Black homeownership gap.

This online mortgage calculator shows how home loan seekers can lower their monthly mortgage payments and total interest charges by making a larger down payment on a home.

Recommended: Do You Still Need to Put a 20% Down Payment On a House?

4. Accelerate Outreach for Mortgage-Ready Millennials

Reaching out to mortgage-ready millennials and improving tax credit incentives for renters to become homeowners may help reduce the Black homeownership gap.

Public-private partnerships can scale up additional programs aimed at bolstering homeownership among low-income people.

5. Focus on Sustainable Homeownership and Preservation

Funded programs that prevent foreclosures in the United States may particularly help Black homeowners maintain their wealth.

Providing homeowners of color with financial literacy may also help preserve homeownership among Black families.

The Takeaway

Racial housing disparities persist, despite federal laws designed to equal the playing field. The effects of redlining echo today, when 74.5% of white families own residential property and just 44.9% of Black families do. Solving this social inequity may require significant action and reform. See how employers can help first-time homebuyers.

If you’re looking for a mortgage lender, SoFi can help you achieve the American dream. Qualified first-time homebuyers can put as little as 3% down.

Explore SoFi fixed-rate mortgage options and view your rate in minutes.


Photo credit: iStock/Morsa Images

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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5 Myths About Student Loans That Can Cost You Money

Don’t believe everything you hear about student loans. With tuition costs outpacing income, the fact is that 70% of college graduates need student loans to help pay for college. But bad information can make borrowers feel like they might have made the wrong decision.

Relax. Here are 5 myths about student loans that are pure fiction.

5 Myths About Student Loans

Have you been taken in by any of these student loan fictions and fallacies? A lot of students and parents are, which is why they’re still floating around.

Myth #1: Interest Rates Are Super High

It’s true that federal student loan interest rates can be higher than auto loan rates. But that doesn’t make student loans a bad deal. Here’s why.

Auto loans and mortgages are “secured” loans. The borrower’s car or home serves as collateral and can be repossessed by the bank if they default on the loan. Secured loans have lower interest rates because they’re less risky for the lender.

Student loans, meanwhile, are “unsecured.” If a borrower defaults on student loans, the bank doesn’t have anything to repossess. And so the interest rate is set a bit higher. But the interest rates on federal student loans are still much lower than what you’d qualify for at a bank.

Myth #2: Saving Money Is Impossible With Student Loans

For most people, student loan payments aren’t sky high. The key is choosing the right repayment plan. Take income-based repayment plans, which set monthly payments at just 10% of “disposable income” — or what’s left after your other bills are paid.

Let’s run some numbers. The average new graduate from a 4-year public college has $32K in student loan debt. And the average salary for 20- to 24-year-olds is $37K.

With income-based repayment, a single grad might pay about $138 per month. If they start a family, they pay much less: just $20 a month until their income grows. Which still leaves room for saving.

See how different terms and rates affect your monthly payment with our student loan refinance calculator.

Myth #3: Student Loans Kill Your Credit

Like any loan, student loans could help or hurt your credit depending on how you manage them. As long as you make your payments on time, student loans may build your credit history and boost your score over the long run.

If you’re struggling financially, consider switching your payment plan, or applying for student loan deferment or forbearance. Neither of these options will hurt your credit.

Myth #4: Student Loans Are All the Same

Nope. In fact, federal student loans are typically a better deal for borrowers than private loans. With subsidized loans, the government pays your interest while you’re in school and for 6 months after. And all federal loans offer special protections to borrowers in case of financial hardship.

In short, subsidized federal loans are pretty much the gold standard.

Myth #5: You Can Get Student Loans Forgiven, for a Fee

It sure seems plausible that a law firm or financial advisor might be able to cut through the red tape and reduce your payments or get them forgiven entirely. For a fee, of course.

Alas, this is a scam. If anyone reaches out to you by phone, text, email, or social media promising to help you with your student loans, it’s utter bull. You may catch on when the caller asks for your financial info, but your parent or grandparent may not, so you might want to warn them.

To make sure you hear about the latest student loan forgiveness news straight from the source, sign up for alerts from the DOE .

ReFi With SoFi

SoFi refinances student loans — both federal and private. (Just be aware that refinancing federal loans makes them ineligible for federal forgiveness and protections.) You can choose to lower your monthly payment by extending your term or pay off your debt faster and save money on interest. SoFi offers flexible terms and low fixed or variable interest rates. And there are no fees: no origination fees or late fees.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.


Photo credit: iStock/Khosrork
SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers.
Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Competing Against Multiple Offers on a House

For sellers, the idea of multiple offers on the home they’ve put on the market is a dream. But for buyers, it can be a big source of stress: How can you get your bid to stand out and be the one selected? This is especially challenging in today’s seller’s market, when bidding wars and stiff competition has become more common.

So do you want to know how to compete against multiple offers on your dream house? You’re in the right place.
Here, you’ll learn some strategies and secrets that can help give you a competitive edge, from boosting your earnest money to waiving contingencies.

Read on to find out:

•   How to compete against multiple offers in a buyer’s and a seller’s market

•   How to collaborate most effectively with a buyer’s agent

•   How to increase your chances of competing against multiple offers on a house.

Multiple Offers in a Seller’s Market

A seller’s market means the demand for houses is greater than the supply for sale, causing home prices to increase and often giving sellers a serious advantage.

It can get pretty competitive for those who need to buy a house, and multiple offers on a house become the new norm.

Seller’s markets and the frequency of multiple offers can happen for a few reasons:

•   More houses typically go up for sale during peak homebuying season in the summer, so seller’s markets are more common in the winter when inventory is low.

•   Cities that see steady population growth and increased job opportunities often experience a higher demand for housing, leading to multiple interested buyers making offers on limited inventory.

•   A decrease in interest rates could mean more people are able to qualify for mortgages, causing an uptick in homebuyers that might work to the seller’s advantage. More interested parties can mean more negotiation power.

As of the end of 2022, despite rising interest rates and waning home construction, there has nevertheless been a hot market, with demand outstripping supply. According to NAR (the National Association of Realtors®), one in four houses on the market receives enough bids to sell above asking price – a significant amount of competition.

Multiple Offers in a Buyer’s Market

In a buyer’s market, there’s a greater number of houses than buyers demanding them. In this case, homebuyers can be more selective about their terms, and sellers might have to compete with one another to be the most sought-after house on the block.

In a buyer’s market, house hunters typically have more negotiating power. The number of offers on the table is usually lower than in a seller’s market, and the winning bid is often lower than the listing price.

In other words, you are likely to be better positioned to get a good deal.

Are Buyers’ Agents Aware of Other Offers?

Unless house hunters are buying a house without an agent, there are certain cases where the buyer’s agent could be tipped off to other offers on the house. This insight could help you hone your offer to be the winning bid.

A lot of it depends on the strategy of the sellers’ agent and whether it’s designed to stir up a bidding war with obscurity or transparency. Either way, the sellers and their agent could choose to:

•   Not disclose whether or not other buyers have made offers on the property.

•   Disclose the fact that there are other offers, but give no further transparency about how many or how much they’re offering.

•   Disclose the number of competing offers and their exact terms and/or amounts.

It’s up to the sellers and their agent to decide which strategy works best for their situation and, according to the National Association of Realtors® 2020 Code of Ethics & Standards of Practice, only with seller approval can an agent disclose the existence of other offers to potential buyers.

However, as you might guess, it can stir up more heated bidding if it is revealed that there are multiple offers. A prospective buyer might learn that intel and hike up their bid or offer other concessions, such as foregoing an inspection.

How Do Multiple Offers Affect a Home Appraisal?

What happens in the event of an all-out bidding war? Say a house comes on the market where few other properties are available, and it has all kinds of dream amenities: an outdoor pizza oven and slate patio, the perfect family room with a wall begging for a ginormous flat screen, a spa-style bathroom with soaking tub, and all kinds of energy-efficient bells and whistles.

Some buyers may be tempted to keep increasing their offer to one-up the competition. Unfortunately, this could lead to drastically overpaying for the house. And when it comes time for the mortgage lender to approve the loan, they may think the home isn’t worth all that money.

In these cases, buyers can add an appraisal contingency to their offer, asserting that the appraised value of the property must meet or exceed the price they agreed to pay for it or they can walk away from the deal without losing their deposit.

But what about in competitive seller’s markets when making mortgage contingencies could mean losing the deal? In those cases, buyers might have to put down extra money to bridge the gap between what their lender is willing to give and what they offered.

Think carefully in this situation about what you would do if the only way to nab your dream home would be to come up with more cash. For some people, it might be possible (perhaps by borrowing from family); for others, it would mean walking away or risk overextending oneself and blowing one’s budget.

Recommended: Home Affordability Calculator

How Can Buyers Beat Other Offers on a House?

Are you wondering, “But how can I compete against multiple offers on a house?” There are a few things homebuyers can do to improve their odds of winning when there are multiple offers on a house. Consider the following options:

A Sizable Earnest Money Deposit

Earnest money is a deposit made to the sellers that serves as the buyers’ good faith gesture to purchase the house, typically while they work on getting their full financing in order.

The amount of the earnest money deposit generally ranges between 1% and 3% of the purchase price, but in hot housing markets, it could go up to 5% to 10% of the home’s sale price.

By offering on the higher end of the spectrum, homebuyers can beat out contenders who offer less attractive earnest money deposits.

Best and Final Offer

Going into a multiple-offer situation and expecting negotiation can be tricky. It’s typically suggested that buyers go in right away with their strongest offer; one they can still live with if they lose to a contender — aka, they know they gave it their all.

In some cases, sellers deliberately list the home for less than comparable sales in the area in an attempt to stir up a bidding war. By going in with their highest offers, buyers could end up paying what the house is actually worth while still winning the deal.

Recommended: 7 Steps to Buying a Home

All-Cash Offer

By offering to pay cash upfront for the property, homebuyers effectively eliminate the need for third party (lender) involvement in the transaction. This can be appealing to sellers who are looking to streamline the sale and close ASAP.

However, this is obviously not possible for all homebuyers. It requires having quite a chunk of change on reserve to make this kind of offer. For some though (including those who just sold another property), it could be an option.

Waived Contingencies

Whether it’s offering the sellers extra time to move out or waiving the home inspection, potential homebuyers can gain wiggle room when they start to waive contingencies.

Contingencies are conditions that must be met in order to close on a house. If they’re not met, the buyers can back out of the deal without losing their earnest money deposit.

By waiving certain contingencies, buyers show that they’re willing to take on a level of risk to close the deal.
This can be appealing to some sellers. Of course, if you are the prospective buyer in a multiple-bidding situation, it means you are taking on risk.

What if, say, after you purchase the home, you discover that there’s $10,000 worth of HVAC work that needs to be done? An inspection would likely have revealed this, and you would have been able to negotiate with the sellers about this. But when you waive the inspection, you will be on the hook for this kind of upgrade.

Recommended: 6 First-time Home-Buying Mistakes to Avoid

Signs of Sincerity and Respect

Because many sellers have pride in and a deep affection for their home, buyers who show sincerity, respect, and sentiment may score extra points.

In some cases, it may be helpful for bidders to write a letter that details what they love about the home, which adds to the positive interactions with the sellers and their agent. It can make the sellers feel as if their home will be in good hands, with people who appreciate it rather than want to do a gut reno and strip away all the features they treasure.

This could lead to winning in a multiple-offer situation, but seek your real estate agent’s advice before penning such a letter. It could be a turn-off to some sellers.

An Offer of Extra Time to Move Out

In some cases, sellers might appreciate (or even require) a bit of a buffer between the closing date and when they formally move out of the house.

By offering them a few extra days post-closing without asking for compensation, flexible buyers can get ahead of contenders who might have stricter buyer possession policies.

Or you might offer to lease back the property for a month or more, if that would help the sellers get settled in their next residence. This kind of flexibility could tip the balance in your favor.

A Mortgage Pre-Approval Letter

Most offers are submitted with a lender-drafted letter that indicates the purchasers are pre-qualified for a loan.

But did you know there’s a difference between getting pre-qualified vs. pre-approved? A pre-approval letter can take it a step further by showing that the buyers are able to procure borrowed funds after deep financial, background, and credit history screening.

Pre-approval signifies to some sellers that the buyers can put their money where their mouth is, lessening the possibility of future financing falling through.

Recommended: Guide to Buying, Selling, and Updating Your Home

Kick-Starting the Homebuying Process

If you’re shopping for a home or plan to do so in the near future, it’s a wise move to get a jump on the process by exploring your mortgage options. For instance, how much of a loan do you qualify for and at what interest rate? How much would you have to put down?

As you move through this process, see what SoFi Mortgage Loans can offer. Our loans are convenient loans and have competitive rates. Plus, they can be available to qualifying first-time homebuyers with as little as 3% down. By knowing what your home loan funding looks like, you may be able to bid with greater confidence.

Get a leg up on buying a home, and find your rate in minutes with SoFi Mortgage Loans.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Investing Survey: 85% of Investors Plan to Change How They Invest in 2023

We don’t need to tell you that 2022 has been a challenging year for investors — what with interest rates soaring, the stock market plummeting, and the onset of another crypto winter.

What you might be surprised to know: There’s some good news here. In a recent survey, we asked 1,000 investors how they managed their portfolios in 2022, how they’re feeling about the market, and what their predictions are for 2023*.

While you might expect some anxiety or pessimism (and there was some), investors overall remain positive after a difficult year. Here’s what they had to say about stocks, crypto, how they coped with investing stress — and more.

Note: We rounded percentages to the nearest whole number, so some data sets may not add up exactly to 100%.

*The survey was completed on October 5, 2022 and was conducted using a general U.S. population data set of 1,000 adults age 18 and older. Survey did not include known SoFi members or a SoFi member data set.

Key survey facts and findings

2022 SoFi Investing Survey

Before we dig into the details, here are some of the standout results.

•  93% of survey respondents continued to invest, despite the current market conditions.

•  Men were more likely to invest than women, and invest more money as well.

•  78% of crypto investors are generally optimistic that values will rebound.

•  And remarkably: 1 in four (25%) of investors had no regrets about 2022

Last highlight: How did investors cope with stress in 2022? Hobbies!

In general, investors stayed the course in 2022.

While the market hasn’t been kind to investors over the past year, it certainly hasn’t stopped many of them from investing. 93% of our respondents kept invested in 2022.

2022 SoFi Investing Survey

93% of respondents have invested in 2022

When it comes to the amount people have invested so far this year, men were more likely than women to invest — and invest more money when they did:

•  $0 – $499: 24%

◦  Male: 44%

◦  Female: 56%

•  $500 – $999: 23%

◦  Male: 50%

◦  Female: 49%

•  $1000 – $4999: 26%

◦  Male: 57%

◦  Female: 43%

•  $5000+: 21%

◦  Male: 68%

◦  Female: 32%

Many investors are still hoping to cash in on crypto.

It’s no secret that the crypto market has taken a beating, especially with the crash of FTX . Nonetheless, people are still holding on to their crypto investments.

45% of respondents say they have cryptocurrency in their portfolios. 65% of them even said they invested more than $500 in 2022. Most crypto investors (65%) are male and under the age of 55.

45% of respondents have cryptocurrency in their investment portfolio.

Over the past few years, cryptocurrency has become a more widely-accepted investment vehicle. Many investors have invested in crypto this year. Of these investors:

•  65% have invested $500 or more in 2022

•  Less than 3% haven’t invested any money into crypto in 2022

•  Only 7% of respondents aged 55 or older are invested in crypto

•  65% are male

And of those who invested $5000 or more in crypto in 2022, 80% are male.

While the crypto market is currently in a steep decline, most investors with cryptocurrency in their portfolios have invested at least $500 in 2022. Here’s what crypto investing looks like in 2022.

•  $0 – $499: 32%

•  $500 – $999: 23%

•  $1000 – $4999: 26%

•  $5000+: 16%

Only 3% of investors who have cryptocurrency in their portfolio haven’t invested anything into cryptocurrency this year.

78% of investors are either confident or cautiously optimistic the crypto market will bounce back

2022 SoFi Investing Survey
The crypto market remains volatile as rumors of a global recession continue to swirl. Despite this financial climate, most investors are hopeful of the future.

Of the 45% of respondents who have crypto in their portfolio:

•  78% of investors are at least “cautiously optimistic” that the crypto market will bounce back

•  Only 5% of respondents believe crypto is “dead.”

Overall, the crypto market still has plenty of believers. Whether that optimism will pay off remains to be seen.

Nearly 90% of people have invested in non-stock market-related assets.

2022 SoFi Investing Survey

Non-traditional market assets are on the rise due to stock market volatility. In fact, nearly 90% of our respondents invested money into a non-stock-market-related asset. Crypto was the most common non-traditional investment choice.

Certificate of deposits (CDs), Real estate investment trusts (REITs), and gold were the next most popular options. One respondent even told us they invested in Magic the Gathering trading cards—definitely a niche investment choice, but representative of investments that aren’t directly impacted by the stock market.

Here’s a full list of all the responses we received:

•  Certificate of deposits (CDs): 24%

•  Real estate investment trusts (REITs): 20%

•  Gold or other commodities: 20%

•  Crypto: 48%

•  Private equity funds: 22%

•  Government bonds: 19%

•  Other or none: 11%

Here’s what investors’ portfolios look like right now.

2022 SoFi Investing Survey

Nearly a third (32%) of respondents have less than $25,000 in their investment portfolio. Here’s a breakdown:

•  $0 – $24,999: 32%

•  $25,000 – $49,999: 22%

•  $50,000 – $99,999: 21%

•  $100,000 – $199,999: 12%

•  $200,000+: 14%

Most investors (nearly 75%) also invest highly into stocks. Cryptocurrency, mutual funds, and cash were the next most popular investment types.

•  Stocks: 72%

•  Cryptocurrency: 45%

•  Mutual funds: 41%

•  Cash or cash equivalents: 38%

•  Bonds: 31%

•  Exchange-traded funds (ETFs): 30%

•  Real estate: 23%

•  Index funds: 21%

•  Private equity: 14%

•  Other: 2%

Market volatility has impacted investors’ purchase and investment decisions.

Market volatility has impacted investors at all ages and stages, but it hasn’t slowed them down. Not only have many people continued to invest during these uncertain times, market volatility has inspired investors to adjust their strategies and spending.

More than a third of respondents (37%) say market volatility has caused them to make impulsive investment decisions.

2022 SoFi Investing Survey
Market volatility has caused some investors to respond emotionally, with over a third of respondents (37%) saying market volatility has caused them to make impulsive investment choices.

31% of these impulse decisions were made by investors aged 18-24. In fact, the younger you are, the more likely you are to make impulsive or emotion-driven financial decisions. Here’s the age breakdown of those who made an impulse move due to market volatility:

•  18-24: 31%

•  25-34: 23%

•  35-44: 23%

•  45-54: 17%

•  Older than 54: 7%

Of all the people who made impulsive investment decisions, 54% of our respondents say they’re happy with their choice. Specifically, only 20% of them regret them.

Maybe these rash decisions taught investors important lessons about the market. Maybe some are confident they’ll rebound.

One third of respondents (33%) had to cancel or delay plans or purchases in 2022 because of money lost on investments.

Many investors’ finances were impacted by the bear market: 33% said they had to cancel or delay plans in 2022 because they lost money on investments.

Ultimately, these mistakes prevented some investors from going on vacations, buying homes, and starting businesses. When we asked those who had to cancel or delay plans specifically which plans were impacted, here’s what they said:

•  Going on a trip: 27%

•  Making a major purchase (home, vehicle, etc.): 22%

•  Home renovations: 19%

•  Starting a business: 15%

•  Growing my family (getting married, having a baby, etc.): 10%

•  Retiring: 6%

•  Other: 2%

Over half of respondents did not make any major investment changes.

2022 SoFi Investing Survey
Market volatility still isn’t scaring investors away. Over half, or 55% of respondents held on to their assets during this year’s economic crisis.

When we asked investors how they reacted to market swings this year:

•  29% said they bought a lot of investment

•  17% said they sold a lot of investments

•  55% said they did not buy or sell investments

The investors that did sell some of their assets (45%) ultimately relinquished less than half of their portfolio. Only 7% sold 76% or more of their total investments.

Many investors have investment regrets about 2022 and are looking toward 2023.

With 2023 on the horizon, many investors are planning to adjust their strategies based on the lessons they learned this year.

People are split on how inflation makes them feel about their investment strategies in 2022:

Inflation can be a thorn in the side of investors. Our respondents were split in how they approached inflation in 2022:

•  39% of respondents said they want to invest more, despite inflation.

•  33% said inflation makes them want to leave their investments alone.

•  28% said inflation makes them want to invest less.

Of the 39% who want to invest more, Gen Z appears to be the most optimistic (27% of that subgroup are between the ages of 18 and 24).

One thing is for certain — confident investors will continue to engage with the market despite inflation.

In general, people have mixed emotions about their investments in 2022, but the most common feeling was optimism (26%).

2022 SoFi Investing Survey

There was also some variance in how respondents feel about their investments. Most were optimistic, and fewer felt stressed, disappointed, and content.

•  Optimistic: 26%

•  Stressed: 19%

•  Disappointed: 19%

•  Content: 15%

•  Excited: 14%

•  Regretful: 5%

•  Angry: 3%

Very few felt regretful or angry, which could be welcome signs of more market participation in the coming year.

While 5% of respondents feel regretful, a full 25% — or one in four investors — have zero regrets about 2022.

That said, 75% of respondents have some type of investment regret this year. And many have learned major lessons this year. Mainly, many wish they had bought more assets at lower prices.

Some of the most common investing regrets respondents expressed:

•  They should’ve bought more crypto when prices were at their lowest (18%)

•  They should’ve bought more stock when the market started to decline (16%)

•  They should’ve sold stock before the market started to decline (15%)

Not everyone was regretful about their investing activities: As noted, 25% of respondents have no regrets at all. And of those that have no regrets, 60% are 45 or older.

Here’s the breakdown of the investment regrets respondents had this year:

•  I have no regrets: 25%

•  I should have bought more crypto while prices were their lowest: 18%

•  I should have bought more stock when the market started tanking: 16%

•  I should have sold stock before the market started tanking: 15%

•  I should have sold my crypto early in the year: 10%

•  I should have bought gold: 9%

•  I should have held onto stock when the market started tanking: 7%

People use a variety of tactics to cope with the stress of market fluctuations:

We got a lot of interesting responses about how investors have dealt with the stress that came from market fluctuation.

•  41% took their mind off their portfolios by engaging in hobbies.

•  37% did their own investment research.

•  31% of them simply stopped checking their balances.

•  22% of respondents talked with their brokers for reassurance. 17% participated in online forums.

And on a positive note, 14% said the markets simply didn’t stress them out.

Nearly a third of respondents (30%) check their investment portfolios every day. And 75% check at least once a week.

Although one coping mechanism of market stress was to avoid checking balances, 30% of our respondents (65% of whom were male) check their investments every day.

Most respondents check their portfolio’s performance at least once a week. Here’s how often investors are checking their investment performance.

•  Every day: 30%

•  2 to 3 times a week: 29%

•  Once a week: 17%

•  A few times a month: 12%

•  Once a month: 7%

•  Less than once a month: 7%

Looking forward to 2023

2022 is almost over and many investors are already looking forward to next year. Let’s see how our respondents plan to adjust their strategies in 2023.

85% of respondents plan to make some changes to how they invest in 2023.

While most respondents have agreed to change their plans, 21% of them want to invest more into the market.

Here are other ways people plan to change their investment strategies next year:

•  19% plan to do more of their own investment research

•  14% plan to work with a financial advisor

•  10% plan to buy into a new type of investment

•  9% plan to change the asset allocations in their portfolio

•  6% plan to decrease how much they invest overall

•  5% plan to use a robo-advisor or automated investing

•  15% don’t plan to change anything.

If this year has taught investors anything, it’s to adapt their strategies and stay optimistic. When asked how they planned to change their strategies, here is how investors responded.

Key Takeaways

Historically, market volatility tends to even itself out, and investment values typically rebound. Investors’ attitudes and behaviors tend to mirror this pattern. While markets have been low in 2022, there are signs of recovery as the year draws to a close, and people appear to be optimistic about an upswing and plan to continue investing.

If you’re ready to take advantage of buying when the market is low, online investing with SoFi Invest is an easy way to get started.


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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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