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.
How to Begin Investing
If you’re brand new to the world of investing, you might feel a bit overwhelmed by the idea of it. Analyzing stocks, balancing portfolios, saving up thousands of dollars to get started — admittedly, it all sounds pretty intimidating.
There’s some good news, though: it’s actually a lot easier (and less painful) to begin investing than you may realize. You don’t need a ton of money, you don’t need a lot of experience or a stock broker on speed dial, and you can start growing your investments today — no matter your age or financial situation.
Let’s talk about the best way to start investing, and how the process can be as simple as possible for anyone.
When to Start Investing
No matter your age, where you are in your career, or how much money you have, today is a great time to start investing. When it comes to growing your money, the earlier you start the better; “today” is always a better choice than “tomorrow.”
You are never too young or too old to start investing, either. Yes, your investment choices will be affected by your age and tolerance (how risky you can afford to be with your money, based on when you plan to retire and will need to pull from those funds). However, it’s never a bad time to let your money grow.
With that said, there are a handful of financial priorities you may want to focus your efforts on first, before you jump into the world of investing. If you are currently walking around with high-interest debt, such as credit card balances, it makes more sense to aggressively pay those down first. Then, you can begin investing whatever savings your cash flow will allow each month.
Which Types of Investments Should You Choose?
Now that you know when to get started (reminder: it’s today), you might be overwhelmed by the actual investment options available to you.
Investments involve a range of products and accounts, intended to generate a profit for you over time. These products include things like:
- Mutual funds
- ETFs (exchange-traded funds)
- Index funds
You may also choose to invest in a tangible product, such as real estate or precious metals (gold, silver, etc.). Regardless of where you choose to start investing your savings, there are some key benefits and downsides to consider.
Determine Your Risk Tolerance
Your current financial situation, total savings, personal preferences, retirement plan and even age will factor into your risk tolerance. This is a gauge of how risky you are willing to be with your investments, in order to balance earnings with potential losses.
Markets are not linear: over time, you will see your investments both lose value and gain value. The key to true growth is staying strong when those values drop, rather than panicking and selling. Only you know how you’ll react when your portfolio loses money, though, so you need to determine just how much you’re able to withstand before deciding how to proceed with investing.
You’ll also want to consider risk tolerance as it pertains to retirement. If you are younger, you have plenty of time to ride out any market waves that may come before you’ll need to actually pull from your portfolio. This allows you to be a bit riskier with your investments, and potentially earn a lot more.
Conversely, if you are nearing retirement, you won’t necessarily have enough time to wait out an unexpected recession or other market decline. In this case, you have a much lower risk tolerance and will need to choose investments that reflect such.
Diversify Your Portfolio
You’ve heard the saying about never putting all of your eggs in one basket, right? Well, the sentiment applies to investing, too.
You’ll want to build a portfolio that includes a variety of different investments. This will not only help maximize earnings over time, but also provide a buffer against loss as the market waxes and wanes.
Rebalance Over Time
As the years go on, and as your risk tolerance changes, you will want to occasionally rebalance your portfolio. Rebalancing allows you to maintain your desired portfolio ratios after factoring in earnings, investment performance and desired risk.
How Much Money Do You Need to Start Investing?
The funds you’ll need in order to begin investing really depend on where and what you plan to invest in first. However, you can technically get started with just a few dollars, so don’t think you need to have thousands stashed away in order to become an “investor.”
Certain investments will have specified starting thresholds, which can be limiting for some beginners. For instance, many mutual funds require a minimum investment in order to start (often between $1,000 and $3,000), and even some savings accounts will have minimum deposit limits.
With that said, though, it’s certainly possible for anyone to begin investing, regardless of how much money you have at your disposal.
You can begin earning in a high-yield savings account with less than a dollar. Just be sure to find an account without monthly fees that also offers a high interest rate. This is a safer way to start earning as your money won’t ever be at risk — no matter what the future of the stock market holds.
If you want to dive into “true” investing but don’t have a lot saved, you can start with an investment platform such as Stash. This app will round up your debit card purchases and invest the change, starting as soon as you have a mere $5 in your account. The process is also automated, so you don’t have to worry about researching investments or monitoring each step.
Have a nice little nest egg saved? You can begin investing in a more aggressive (and higher-earning) vehicle, such as an ETF or even individual stocks. Which one you choose will largely depend on your own personal risk tolerance.
Things to Remember Before Investing
There are a few things you’ll want to keep in mind before you start investing that will save you money and stress along the way.
Start with tax-advantaged options. The smartest way to optimize your journey is to utilize all of the benefits available to you. This means starting with tax-advantaged investment accounts, such as 401(k)s and IRAs. These will save you a pretty penny in taxes, putting even more money back in your pocket down the line.
Don’t pass up free cash. Many companies offer retirement matching as part of their employee benefits package. If your employer is willing to match your retirement contributions — either by giving you an additional percentage or dollar amount — it’s wise to at least invest enough to take advantage of the full match. Failing to do so is the same as leaving free money on the table at the end of the year.
Automate the process. If you want to make investing easy, especially when you first start out, you need to put it on autopilot. By using one of the many robo-advisors on the market today, you can automate everything from deposits, investing, re-investing and even rebalancing your portfolio. Many of these charge lower fees than traditional advisors, and some are even free.
Do what you can... but do it now. When it comes to investing, the most important part is to start as early as you can, even if it only means investing a few dollars at a time. By waiting, you will miss out on the key component of financial growth (and compound interest): time.
Investing can seem intimidating, especially when you’re brand new to the concept. However, by familiarizing yourself with the ins and outs of investing you can set yourself — and your finances — up for many years of success.