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.
Our Top Picks for the Best Personal Finance Books
Personal finance is really what it is, ‘personal’. Your personal finance journey is built on your past financial decisions, your current financial situation and where you envision yourself financially in the future.
While this journey is as personal as it gets, there are some basic underlying guidelines that help you in correcting any past financial mistakes, making the best of your current financial status while making the best decisions that shape up a great financial future for you.
If you want to build a great personal finance journey, you need to brush up your financial literacy in a few key areas; some of the best personal finance books can help you do just that.
Budgeting is an act of understanding your entire financial picture: the past, present and future. Your past financial decisions have led up to where you currently are in your present financial situation, and budgeting helps you take all this into consideration while making a plan for your future.
A good financial budget incorporates your income, expenses, assets and liabilities, and debt, while helping you create a money and spending plan.
Need a little help on budgeting? These books help you kick start and roll with your budgeting journey:
1. You Need a Budget: The Proven System for Breaking the Paycheck-to-Paycheck Cycle, Getting Out of Debt, and Living the Life You Want by Jesse Mecham
Jesse bases his book on four simple rules:
- Give every dollar a job: basically, this implies planning for every dollar and assigning jobs and tasks to your money.
- Embrace your true expenses: this rule prompts you to think about future possible expenses, especially those large ones, and helps you plan ahead in bits for these expenses.
- Roll with the punches: build a budget and strive to work by it, but when things go a bit over, give yourself some wiggle room, be flexible and adjust accordingly. Don’t be too hard on yourself and do not quit.
- Age your money: learn to be purposeful about spending your money, spend only when needed and avoid living paycheck to paycheck.
2. The One Week Budget: Learn to Create Your Money Management System in 7 Days or Less! by Tiffany Aliche
This book takes you through specific steps and actions to create a good money management habit while bossing through the act of managing bills, expenses and budgeting. Learn how to manage your spending habits, start saving and build a financial plan.
Debt is simply what you owe others and what you are liable for. You may have racked up some debt in form of student loans towards schooling, a line of credit drawn towards a personal or business venture or even a mortgage. Dealing with debt may be overwhelming and sometimes, you need help with planning towards paying back and offsetting your debt. To pay off debt, you have to be intentional about it and account for this in your financial budget.
Here are a few recommendations for the best personal finance books that educate you on better ways to handle debt:
3. Zero Down Your Debt: Reclaim Your Income and Build a Life You'll Love by Holly Porter Johnson and Greg Johnson
These authors teach from their own experiences on how to tackle debt. They propose the zero-sum budgeting strategy to getting rid of debt and taking control of your finances. The book includes actionable items while highlighting key truths to destroying debt and building wealth. You will learn how to take charge of your finances and eliminate debt.
4. How to Get Out of Debt, Stay Out of Debt, and Live Prosperously by Jerrold Mundis
Jerrold walks you through getting out of debt, once and for all. He highlights what exactly debt is, the warning signs, how to negotiate and plan debt paybacks while handling the pressures of living in debt.
Ideally, the zeal and ability to save comes after the relief of settling your debt. Savings are usually targeted towards a certain cause, most of which include education, business, retirement, investments, down payment for purchasing a house, buying a car or even for a vacation. Of course, the money you intend to put aside should be reflected in your budget. This helps you plan better and measure your current savings against your target.
These books should very much help you on your commitment towards saving better:
5. Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez
This classic book teaches the basics of saving and leads in the direction of investing. It is especially helpful for beginners who want to tread the path of financial independence and steer towards intentional personal finance habits. The authors explore nine steps that help you build a better relationship with money.
6. 365 Ways to Live Cheap: Your Everyday Guide to Saving Money by Trent Hamm
If you aren’t ashamed to live cheap and get your finances in order, this book suggests ways to cut little expenses that make a difference in the long run. The author gives you cheap tactics on saving money in your everyday life.
A lot of people have questions on and about when to start investing, how to start investing, the best investment tools and platforms to use, or even the best class of assets to invest in. Investing is a step in your financial journey that helps you put your money into assets that are expected to appreciate, and yield returns over time. Sometimes, this may not be the case, as certain market conditions and economic factors cause returns to fluctuate.
While the investing process may seem daunting and overwhelming, when you get a grip on it and understand how it works, it becomes rewarding. Investments in different assets such as stocks, real estate, Exchange Traded Funds (ETFs) and bonds are targeted towards favorable returns and progressive steps in building wealth and a great financial future.
These great books would definitely help you understand investing and how you can generate wealth through the act of investing:
7. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle
John opens your mind up to the world of financial markets and investment platforms. He introduces and explores the world of index funds, bond funds, investment and market returns. This is an interesting read if you fancy the world of investing and are keen to learn more.
8. Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam
This book provides information on the basics of financial literacy as regards investing. The author explores investing in Index funds and Exchange Traded Funds (ETFs). Learn the ropes of smart investing through this book.
This list of best personal finance books is obviously subjective, but these great reads are sure to educate you on the necessary steps to take towards developing a better personal finance journey and building a good relationship with money, while thinking towards generating wealth.