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.
Blue Chip Stocks
Everybody knows investing is a smart idea. Whether you’re putting cash aside for a rainy day, some big goal or simply for retirement, turning that capital into more money without doing any work is an incredibly powerful concept.
One of the great things — or terrible things, depending on your perspective — about investing is there’s a wide variety of ways you can get rich. Take real estate investing, for example. You can do something as basic as renting out a spare room to a friend or on AirBnb. You can buy a house in the neighborhood and rent it out. Thousands of investors make a living flipping property. Or, you can finance other real estate investors; the possibilities are endless.
It’s the same thing with the stock market. It seems like every serious investor has their own method, ranging from gobbling up deep value stocks to sticking only to growth stocks. Some swear by the wisdom of charts, while others will search for clues in the back of financial statements.
Personally, when it comes to the stock market, I like to stick to so-called “blue chip” stocks. Let’s take a closer look at what’s so appealing about these securities and why I think your portfolio might benefit from having some blue-chip names in it.
What Exactly Is a Blue-chip Stock, Anyway?
The history of the term dates back to the early 20th century, when investors started referring to the safest and most valuable stocks as blue chips because those were the highest value chips in poker.
Thus, blue chip securities started out as the most valuable of stocks, with the highest share prices. The term has evolved over the years to represent what investors view to be the safest stocks in the market.
Often, it’ll take a company decades from its initial public offering to be considered a blue chip name, but that is changing a bit today. Many technology companies are now going from being considered risky to much safer in less than a decade, thanks to their ability to grow at a quick pace and integrate themselves into our lives. For instance, many investors consider still somewhat risky technology stocks like Facebook, Amazon, and Netflix as must-own blue chips, because they can’t picture life without these services.
Personally, I like to stick with a simple definition of a blue-chip stock. If it’s a multi-national company that you’ve heard of and admire, chances are its stock is a blue-chip. This rule isn’t iron-clad, of course, but it tends to be right around 90% of the time.
Examples of Blue-chip Stocks
It’s not hard to find blue-chip stocks to be candidates for your own portfolio.
The first place to look would be companies you interact with every day. You wake up and drive to work in your General Motors car, stopping at McDonald’s along the way. Along the way you get a text message on your Apple iPhone through AT&T’s network, asking you to pick something up at Walmart before you make it into the office.
While working you might use Google or Microsoft’s software to do your job, on a computer powered by an Intel chip and connected to the internet through a Cisco router. Break time is fast approaching, so you go to the vending machine for a Coke and a bag of Lay’s potato chips, which is a division of Pepsi.
The way home is for running errands. You stop at a Bank of America branch to sort out issues with a debit card, and the clerk tries to convince you to apply for a new Mastercard. T
he next stop is Walgreens to pick up a prescription and some Colgate-Palmolive toothpaste. Finally, you get home and it’s time to relax. So, you fire up your Sony PlayStation and try your luck at the latest Electronic Arts video game.
The big advantage to blue chip stocks is, generally, they are much safer than lesser-known companies.
Say a blue-chip stock has a crummy quarter and the price slides. Because the company is so well known, bargain hunters show up and start buying, which supports the stock price. The decline is also likely well-known by the business community, which also helps spur on a recovery.
Another advantage to blue-chip stocks is psychological. The stock market is a risky place, even if you stick to safe securities. Having a portfolio stuffed with well-known names can help a skittish investor navigate inevitable downturns.
It also helps when discussing your investments with others. A portfolio stuffed with obscure ultra-cheap value stocks or high-risk growth stocks will be questioned. It’s hard to find much wrong with safe companies that are so big we deal with them every day.
One of the biggest disadvantages to a portfolio filled with ultra-safe blue-chips, is you’re unlikely to find a huge winner in a group of stocks known for being safe.
That doesn’t mean you’ll be sacrificing much in long-term returns, however. A diverse portfolio of blue-chips has returned approximately 10% a year for decades now, which is easily enough to make many of your long-term goals come true. It just won’t be as exciting as holding a sexy growth stock that goes up 1,000% in just a few years.
From a value investing perspective, blue-chip stocks rarely get cheap either. Outside of market meltdowns, there are few attractive entry points. This isn’t so bad for investors who put a little cash to work every month, but it’s disappointing to bargain hunters.
Finally, some investors don’t like blue chip stocks because they tend to pay out some of their earnings back in dividends. They argue these companies would be better off reinvesting in growth, and that dividends aren’t tax efficient because they’re taxed twice — once as company profits and once in the hands of shareholders.
The Bottom Line
Overall, investing in blue chips is a smart choice for just about every investor. They have numerous advantages, including relative safety, a solid history of growth, big advantages that can’t easily be replicated and more.
Sure, there are some disadvantages — like a lack of serious growth, and they’re not terribly exciting —but those pale in comparison to the many advantages.
Thousands of investors have slowly gotten rich by investing their cash in a diverse portfolio of blue-chip stocks and letting the magic of compound interest do its thing. There’s no reason why you can’t join this elite group. Just be warned — the process will not happen overnight. Blue chip stocks are not a get rich quick scheme by any means.