It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
Best Dividend Stocks 2020
The calendar has turned and we’re officially into 2020. It sure doesn’t seem like two decades since Y2K, but the calendar doesn’t lie.
It’s time to focus our attention on investing for this upcoming year. Personally, I like dividend stocks. These securities offer dependable income, no matter what happens to the underlying stock. They’re generally more stable, which protects your investments during any foreseeable downturn. Many investors also really enjoy partnering with companies they use everyday; mature firms that usually end up paying generous dividends.]
Let’s take a closer look at what makes a great dividend investment and a few top picks for the best dividend stocks 2020.
What Exactly Is a Dividend Stock?
A profitable company has several things it can do with its earnings. The cash can be reinvested into new growth areas. It can also be used to acquire a competitor. Or it can be given back to shareholders, who are the true owners of the organization, through dividends.
Companies with predictable earnings will often institute a regular dividend program. These firms will pay a portion of their profits back to investors every three months, although some will choose a monthly or yearly dividend.
Investors can then use this cash to buy more shares of the company, buy shares in a different company, or to spend on snacks; it’s completely up to you.
Generally, a stock starts to pay a dividend when it becomes more mature. This greatly reduces the risk to investors, although it also means most dividend stocks won’t produce stellar returns either. It’s an acceptable trade-off to make, especially as investors get a little older or after they get burnt chasing after a sexy growth stock.
What Makes a Great Dividend Investment?
Generally, what you’re looking for is a company with the following characteristics.
First, we want to make sure it’s still growing. Like I’ve already mentioned, most dividend stocks are more mature. So, they won’t be growing by 50% or 100% every year. But we still want to see both the top and bottom line expanding, even if it’s as little as 3–5% per year.
Next, you’ll want to invest in a company that isn’t at risk of being disrupted. Many retailers, for example, are hurting because of sustained pressure from Amazon. Apple, meanwhile, is less vulnerable to competition.
Once you’ve identified companies with these two characteristics, your next analysis should be valuation. Look at a stock’s underlying earnings and see if it’s expensive compared to other stocks. The average stock trades at a price-to-earnings ratio of around 20, so ideally, you’re looking for something a little cheaper. Paying a slight premium for an excellent company isn’t the end of the world either.
Analyzing earnings will also be able to tell you if a company can truly afford to pay its dividend. Some people take this a step further and insist on stocks that have consistently raised their dividends over time. This strategy has a lot of merit, but some people find it too restrictive.
Ultimately, the best investment returns will come from a combination of both dividends and capital gains. One common mistake investors make is focusing too much on the dividend part of the investing equation. If a stock pays a 7% dividend but shares go down 10%, the total return is pretty lackluster.
Top Picks: Dividend Stocks for 2020
Let’s take a closer look at four dividend stocks that are poised to do well in 2020.
Pepsico (NYSE:PEP) is one of the world’s top packaged food companies. It owns various soda brands, Lay’s potato chips, Gatorade, Quaker Oats, Tropicana and Aunt Jemima. It also recently acquired Sodastream. Thanks primarily to the strength in the company’s food brands both domestically and internationally, Pepsi’s top and bottom lines keep consistently growing. People still must eat, and Pepsi’s potato chip brands are one of the top snack foods. Shares also trade at a reasonable 16x P/E ratio, which is a good value. Pepsi’s dividend is currently 2.7%, and it has raised its payout every year since 1965.
3M Company (NYSE:MMM) is one of America’s largest industrial companies. It sells hundreds of products you likely use often, like Post-It Notes, various kinds of tape and cleaning tools. Thanks to a recent sell-off — shares are down approximately 25% over the last year — so the stock is a good value. The company trades at 18.5x 2020’s earnings expectations, and it has a 3.2% dividend yield. It has raised its dividend every year for the last 61 years.
If you’re looking for a little more yield, perhaps Ford (NYSE:F) and its 6.5% dividend yield might be a better choice. Ford also trades at a low price-to-earnings ratio of less than 10x, and its trucks are still considered the go-to vehicle for millions of Americans. One issue with Ford is the company may see weakness if the economy starts to suffer, since most people will delay the purchase of a new car during tough economic times. Like 3M, Ford’s share price is currently cheap. It looks to be a pretty good time to buy.
And finally, let’s take a closer look at banking giant Wells Fargo (NYSE:WFC). Shares are struggling lately because of fallout from its account sales scandal, which has hit the bottom line. I’m confident the company can turn things around, and the top line has continued to grow throughout this tough time. Brave investors who buy today are getting the company at less than 12x earnings and get to collect a 4.2% dividend yield. The company has also raised its dividend for 8 consecutive years.
The Bottom Line
After a decade of great returns, you might not think there are any good stocks left out there. I disagree. Sure, some stocks are quite overvalued (I’m looking at you, technology sector!), but there are many other stocks that are fairly valued today. And, as a nice bonus, most of them pay dividends.
The best time to invest is today. Even if the stock market has a rough couple of years, these stocks should still deliver plenty of dependable dividends. This is passive income you can either put back to work or spend on any number of things.
That’s the true beauty of dividend stocks. Once you get enough of them, financial freedom is within reach. Who wouldn’t love that?