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.
From Regular Appointments to Unexpected Illnesses
Health insurance is one of the most talked-about topics in American politics, and for good reason — it is essential to one's health and financial well-being.
What Is Health Insurance and Why Do You Need It?
In America, it is important to pay attention to the costs of different medical services. These are the average costs of routine medical care procedures:
- A 10-minute doctor visit is $68
- An eye examination is $234
- An emergency room visit is $1,233
- An ambulance ride can range from $25 to $1,200
Fortunately, with the right coverage, you don’t have to pay the full amount of these medical bills out of pocket. This is where health insurance comes in handy.
Insurance is an arrangement created to spread the risk of potential costs over a larger pool of people. For health insurance, the costs include paying for the medical services required for everything from routine preventive care to major illnesses.
The organizations that manage and administer this risk include government agencies, private businesses and not-of-profit entities. These organizations will calculate the financial value of the risk and charge monthly premiums or payroll tax to their participants.
In return, participants will get peace of mind that in the event of a medical emergency they will not be responsible for paying all the expenses by themselves at once.
Different Aspects of Health Insurance
Health insurance can be an overwhelming topic due to the different types of health insurance available. In order to determine which health insurance is right for you, there are a few factors to consider:
- Your desired monthly premium
- Your deductible
- Your amount of copay and coinsurance responsibilities
- Your access to different health care providers and services
The Monthly Cost of Health Insurance
In order to finance the cost of hundreds of thousands of people's medical expenses, the administrators of health insurance charge a monthly fee, called a premium, for their coverage.
Health insurance monthly premiums will vary based on your location, age, preexisting conditions and income. You can compare different health insurance plans and their premiums using healthcare.gov.
Without any governmental support, Americans spend an average of $500 a month on health care monthly premiums. As mentioned, insurance plans can vary based on the state. California residents pay an average of $435 per month, while those residing in Wyoming pay an average of $865 per month.
Paying a Deductible
When choosing a health coverage option, you will need to pay attention to the deductible. This is the amount you are required to pay out of pocket before your health insurance will pick up the bill.
For example, a $1,000 deductible plan means you have to pay the first $1,000 of your medical expenses yourself before your insurance company will provide financial assistance. Typically, a lower deductible plan will result in higher monthly premium costs. You will need to calculate what is better for your budget: spreading out the costs monthly or paying more upfront at one time.
Health care plans can differ in how the deductible is managed. For example:
- Preventive services (e.g. routine checkups) may be covered fully by your insurance provider even before you've paid your full deductible
- Different services, such as prescription medicine and surgeries, may have different deductible levels
- Family health care plans tend to have both individual deductibles, which apply to each family member, along with a combined family deductible amount
Copayment and Coinsurance Expenses
In addition to paying a monthly health insurance premium and agreeing to an annual deductible, you may also need to copay or coinsure for each medical visit you have.
Copayments are predetermined, flat fee amounts you will need to pay yourself for every medical service. For example, every time you visit your doctor, you may be required to pay a $20 copayment fee. This is an out of pocket expense and is not normally counted toward your annual deductible.
Coinsurance is a predetermined percentage of your health care expenses that you agree to pay. An 80/20 insurance plan simply means that after you have paid your deductible and copayment, the bill is further split between your insurance company and you. 80% of the bill should be paid by them, while you are responsible for the other 20%.
Types of Health Insurance Plans
There are many different types of health insurance plans, with the most common being:
Managed Care Plans
More affordable plans that outline the specific health care providers you can use. These plans can range in the flexibility of choosing your health care provider.
- Health Maintenance Organizations (HMO): Limited number of health care providers, usually no insurance claims required.
- Preferred Provider Plans (PPOs): More flexibility to choose health care providers, however higher costs and more paperwork required when choosing an "out-of-network" provider
Least restrictive plan in terms of choosing a health care provider. It allows you to choose the doctor or hospital of your choice; however, this also means you will be required to file insurance claims after the fact.
Health Savings Account
A tax savings benefit that allows you to use tax-free earnings on qualified medical expenses.
Plans that only cover serious illnesses or injuries.
Plans that cover specific cases, such as a hospital indemnity policy that pays a fixed amount per day that you are hospitalized. These are typically used to cover expenses that your normal health care insurance plan does not.
Buying Health Insurance Outside of Work
Most Americans are covered by employer-provided health insurance plans. However, there are options outside of work to get insured.
State Health Insurance
For lower-income Americans, Medicaid is a health insurance program offering free to low-cost plans. Each state has different income thresholds, so you will need to check with your state to see if you can qualify.
Private Health Insurance
For those with a higher income or desiring additional health care benefits, there are a number of private health insurance companies.
The Marketplace, available at HealthCare.gov, is operated by both the federal and state governments and helps Americans find affordable health care options from private insurance company providers. Shopping through the Marketplace can help you identify additional health care related tax credits and savings.