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 S&P 500 Index Fund
Often, when it comes to investing, a simple plan is best.
There are many investors who dedicate their lives to beating the stock market, yet their efforts don’t seem to be worth it. These folks might be smart, dedicated and hard working, but they just can’t seem to beat the performance of their peers.
And then there’s the time involved. Many full-time investors make little more than minimum wage once we factor in all the hours they spend studying the market and poring over balance sheets. They do it mostly for the intellectual challenge, but that doesn’t make the facts any less true.
Fees are the biggest reason many professional money managers can’t beat the index. A mutual fund charging 1.5% must beat the index by 1.5% annually just to match the performance of a passive investment with much lower fees. It’s hard to beat the overall market by that much on a consistent basis, so these funds inevitably come up short.
With all this in mind, it’s little wonder why so many investors are choosing a passive investing path. By putting their cash in a common index fund – like one that follows the S&P 500 – these investors get solid long-term returns, pay minimal fees and outperform many professional investors. Their time is freed up for other preferable activities.
Let’s take a closer look at which S&P 500 index fund is best, including what exactly an index fund is, how they work and what you should look for.
What Exactly Is an Index Fund?
An index fund (or exchange traded fund [ETF] as they’re often called) is a passively managed collection of stocks that track an underlying index. As the index changes, so does the composition of the fund.
This passive management strategy allows the index fund to offer ultra-low fees. Many funds have management fees of under 0.10%. These low fees keep more money in your pocket.
Now that we know an index fund simply tracks an index, it brings up the next question. What exactly is an index?
To put it simply, an index is a collection of stocks with similar characteristics which are grouped together in a logical way. This index is then given a price so investors can track the performance of the underlying stocks as a group.
The S&P 500 is a terrific example because it’s the most well known of all the stock market indexes. It tracks the 500 largest U.S. publicly traded companies. As that list changes, so does the composition of the S&P 500 index. Since most large companies are stable, the constituents of this index only change in small ways over time.
There are countless other stock market indexes. You’ve likely heard of the Dow Jones Industrial Average, which tracks 30 of the largest U.S. companies. There’s also the NASDAQ 100, which tracks large U.S. technology stocks. Most other nations also have benchmark stock indexes that are used to track the performance of their individual markets.
How a Stock Index Works
As previously mentioned, a stock market index is a passive vehicle. Only small adjustments are made to the index over time.
A stock market index is the property of a financial company who creates the index in the first place. It’s then up to this company to make any changes to the index as they see fit. Since most indexes have hard and fast rules in place, it’s only a matter of applying these rules to see which companies make the cut.
Let’s go back to the S&P 500 again. The owner of that index is Standard & Poors, which offers all sorts of financial services for the investing industry, including multiple other indexes. Since the rules of the S&P 500 are simple, changing the composition of the index is simple too. Each quarter, Standard & Poors resets the index.
Adjustments are then made to underlying ETFs that track the index. Yes, that means all the ETFs that track the S&P 500 will be buying the same stock and selling another, a process that can cause short-term gains for the lucky stock and declines for the one being punted from the index.
What’s the Best S&P 500 ETF?
Many hardcore index investors have one simple answer to this question. The best S&P 500 index funds have the lowest fees.
If that’s your only criteria, then the answer to this question is simple. The Fidelity S&P 500 Index Fund charges a mere 0.015% annual management fee. Many suspect that this fee isn’t even enough to cover the cost of the fund, meaning Fidelity is subsidizing this ETF to get additional funds under management.
There’s just one problem with this index fund. It’s technically a mutual fund, which means there are slightly different rules versus buying an exchange traded fund. An exchange traded fund is purchased just like a stock. A mutual fund isn’t, meaning there will be a slight delay in getting your shares. Over the long-term these differences don’t matter at all, so don’t let the mutual fund aspect of this S&P 500 index fund scare you.
If you’re looking for liquidity, the best choice is the SPDR S&P 500 ETF (NYSE:SPY), which is the largest and most famous S&P 500 index fund. Many people turn to this index fund because it’s also been around the longest, and they value that stability. Keep in mind, however, that this index fund has a management fee of 0.09%. That’s not much when compared to other investment products, but it is more than the other names on this list.
Vanguard’s S&P 500 ETF (NYSE:VOO) offers plenty of liquidity – especially for a retail investor – and a low management fee of 0.04%. It’s also backed up by the Vanguard name, a non-profit company that is dedicated to keeping investor costs low. There’s a reason why Vanguard is the top choice for many; it’s a solid choice for most investors.
The Bottom Line
Owning an S&P 500 index fund is an excellent way to earn solid returns on your money. The best U.S. companies end up in the S&P 500, and it’s hard going wrong owning a collection of the best.
Most S&P 500 index funds are very similar products. They have the same weighting in the same companies because it’s all the same index being tracked. If you pick an ETF with a low management fee and good liquidity, you’ll end up doing about as well as the index itself. If you’re investing regularly, that should be enough to generate some pretty significant wealth over time.