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.
The Best Personal Finance Apps
If you've tried to stick to a budget in the past, you understand how difficult it can be to control your spending. For many people, the problem isn't a lack of willpower, though. You may have an income shortfall that makes budgeting impossible. You may be at the mercy of one financial emergency after another or you may be dealing with an irregular income.
Tracking your spending and budgeting are proven ways to make your hard-earned cash work for you. Personal finance apps offer 24/7 access to your plan, so you'll be able to make crucial day-to-day financial decisions with confidence.
Why You Should Use a Personal Finance App
While budgeting is a necessary part of managing your money, there's a lot more to becoming financially successful than mastering basic math skills.
Your smartphone functions as your calendar, photo album and alarm. It serves as your connection to the outside world for both work and personal purposes. So, it makes sense that your budget can live there, as well.
A well-designed personal finance app works as a budget, but it also helps you track your bill due dates, so you aren't left with a late fee and a black mark on your credit report.
Depending on how much support you want, you can connect with an app that offers interest-free payday advances to help you get out of a jam while avoiding more expensive short-term loan options.
Some of the best apps also offer short videos to help keep you on track, or one-on-one sessions with a money counselor to help you stay motivated and answer your questions.
You may want to use more than one app, depending on which services best meet your needs. For example, if you already use Mint, you may want to try out Goodbudget to better understand and control your spending habits.
There isn't a one-size-fits-all budgeting solution, so feel free to try a few of these options before settling in for the long haul. All the personal finance apps highlighted here have a free version, except You Need A Budget (YNAB), which offers a 34-day free trial. Each of these apps has the potential to help you track, organize and direct your money so you can start (finally) making progress toward your goals.
Track your bills, income and savings moment-by-moment with PocketGuard. This thoughtfully created app helps you discover ways to save money, projects hypothetical spending based on your habits, and lets you know how much money you'll have left after you pay bills.
It's not easy to make decisions on-the-go about discretionary spending. PocketGuard helps you understand your financial situation in the moment with just a quick glance at your smartphone.
2. You Need a Budget (YNAB)
It may not come naturally at first, but you'll soon learn how the decisions you make day-to-day about your money could affect your future with YNAB. Loved by young professionals, this app is intuitive. It focuses on basic principals of money management and has the potential to change how you think about your income and expenses.
A series of one-minute videos help you understand how to set up the app so it works with your financial accounts. Free online education, a generous introductory period, and the ability to account for every dollar of your income are a few attributes that make this one of the most powerful personal finance apps of 2020.
If you want an app that handles the heavy lifting, Albert is worth a try. It keeps track of your spending, income and all your accounts. Budget creation is automatic. Albert even puts money away in a savings account for you. If you get into a tough financial spot before payday, you can get a $100 interest-free advance without a credit check. The app also offers simple recommendations to help improve your overall financial health.
If the idea of splitting your cash into envelopes to help you control spending seems like it would work for you, try Goodbudget. The idea of carrying cash makes some people uncomfortable, but with Goodbudget, you get the benefits of the envelope method without the risk.
Access up to ten digital "envelopes" inside the app to use with one financial account to help budget your income in the free version. With the pro version, you'll get financial tools, unlimited envelopes to use with unlimited financial accounts, as well as access to your account history to help take your budgeting to the next level.
No matter which budgeting app you choose, give yourself some time to get used to how it works with your day-to-day spending. When you find a budgeting app that meets your individual needs, controlling your spending and making a plan for your money becomes much easier. Soon, you'll see real progress toward your financial goals.
For more budgeting app options, including those for small businesses, check out our additional blog post on budgeting apps.