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.
Work Your Way to Being Debt-Free
Welcome to The Finance Mastermind’s custom credit card calculator. Do you have credit cards? Do you have credit card debt? If so, our credit card calculator will certainly help!
After completing a few simple inputs, such as your credit card balance, interest rate and minimum payment, you’ll find out how long it will take to pay off your credit card debt. Do you want to speed up your repayment? Play around with our calculator to see how soon you can get your debt paid off.
In this article we’ll also look at how to minimize credit card use in the future, moving credit card debt to a low interest card, and the pros and cons of reward points.
Basic Functions of the Credit Card Calculator
To get the most out of the custom credit card calculator, you’ll need to fill in some basic information. Here are the fields:
- Credit card balance: This is the outstanding balance currently on your credit card, including any interest charges and fees.
- Interest rate: This is the interest rate you’re being charged on your credit card. You’ll want to review your credit card statement and cardholder agreement to have a good understanding of how interest is calculated. Please note that retail or store credit cards tend to have higher interest cards than standard credit cards.
- How your minimum payment is calculated: This is the minimum payment you’re required to pay each month on your credit card to keep it in good standing. Your minimum payment will be either a percentage of your outstanding balance (ex. 1% of the balance) or a fixed amount (ex. $10). Your cardholder agreement will explain the method used to calculate the minimum payment on your credit card.
- Minimum payment or a fixed payment: This is the amount you can afford to put towards paying off your credit card. A fixed amount is any amount above and beyond the minimum payment.
Once you enter the above information, the credit card calculator will output the following helpful information.
- How long it will take to pay off your debt: This is the length of time it will take to pay off your credit card in full. If you’re not happy with how long it will take to pay off your credit card, try playing around with the credit card calculator. Put in a higher fixed payment to see the difference it can make in paying off your credit card debt faster.
What Is Credit Card Debt?
Before we talk about what credit card debt is, it’s easier if we define what a credit card is.
A credit card is payment card that allows the user, the cardholder, to pay for goods and services purchased at merchants or retailers. The credit card company is paying for your purchase ahead of time with the promise that you’ll make at least the minimum payment once your credit card bill comes due. A credit card is considered revolving debt since it doesn’t have a fixed number of payments like a personal loan. Instead, you’re able to borrow up to your agreed upon credit limit.
Credit card debt is unsecured consumer debt. It’s unsecured because unlike a mortgage or car loan, there isn’t an asset backing it. That makes it riskier for the credit card company, since it would have a tough time recovering the money if you failed to make at least the minimum payment. For that reason, credit cards almost always have higher interest rates than mortgages, car loans and other consumer debt.
How to Pay Off Your Credit Card Debt
Are you struggling to pay off your credit card debt? There are two popular methods to rid yourself of your credit card debt: the debt avalanche and debt snowball methods. Let’s look at both debt repayment methods and figure out what one would work for you.
For those of you who want to save the most interest, the debt avalanche method makes the most sense. When using the debt avalanche method, you’ll focus on paying off your credit card with the highest interest rate first.
For instance, let’s say you have two credit cards with outstanding balances. The first credit card has a 19% interest rate, while the second one has a 29% interest rate. If you’re using the debt avalanche method to pay off these credit cards, you’d pay off the second credit card with the interest rate of 29% first, while still making the minimum payment on the first credit card at 19%.
Why? Because the card with the 29% interest rate is costing you the most in interest. Once the second credit card is paid off, only then would you focus on paying off the first credit card at 19%.
Using the debt snowball method, instead of focusing on paying off the credit card with the highest interest rate, you’d focus on paying off the credit card with the lowest outstanding balance, then the second lowest balance and so forth. It’s kind of like rolling a snowball down a hill, hence the name.
In the above example, let’s say the first credit card has a balance of $2,000 and the second one has a balance of $4,500. Since the first credit card has the smallest balance, you’d focus on paying that off first, while making the minimum payment on the second credit card.
You may think this method doesn’t make any sense. The second credit card has the highest interest rate, so how could it possibly make sense to focus on paying the first credit card off? At first glance while the debt snowball method may not seem to make the most sense from a math perspective, we humans tend to gain the most satisfaction from the small victories.
By paying off your credit cards with the smallest balance first, you can celebrate the small victories on your way to credit card debt freedom.
Minimizing Credit Card Use in the Future
A credit card can be a powerful financial tool when it’s used responsibly. There’s nothing wrong with using a credit card, if you use it responsibly. That means paying off your credit card balance in full when your statement comes due. It’s when you’re constantly carrying a balance on your credit card that you can find yourself in trouble.
If you’ve tried your very best to use your credit card responsibly, but you keep overspending and carrying a balance, sometimes it’s best to minimize your credit card use in the future. There are several ways to limit your credit card usage.
- Only carry your credit card with you if you plan to make a purchase. Otherwise, leave it at home.
- Stay away from places that trigger you to spend. For example, if you find that you spend money every time you go to the mall, the next time you’re tempted to go to the mall to “window shop” go somewhere else like the park or gym instead.
- Before you swipe or tap your credit card, stop and think. Treat your credit card like cash. Ask yourself whether you can afford to pay off your credit card in full before you make a purchase.
- Online shopping is another area where it’s easy to overspend. Put your credit card away so it’s not so easy to access. You should also avoid saving your credit card information online. That way you’ll have to stop and think before you make a purchase.
A word of warning: while there’s nothing wrong with minimizing your credit card use, you’ll want to keep at least a couple of your credit cards. If you cut up all your credit cards and go to apply for a mortgage, your application may be denied due to a lack of credit history.
Having at least two credit cards with a minimum credit limit of $2,000 open for two years or more can go a long way in helping you get your mortgage application approved.
Moving Credit Card Debt to a Low Interest Card
If you have a lot of credit card debt and you’re struggling to pay it off, you might consider moving your credit card debt to a low interest card. This is also known as a balance transfer. A balance transfer is when you transfer the balances of one or more credit cards to a new credit card, often at a lower interest rate.
Before you do a balance transfer, it’s important to make sure it makes sense. Credit cards will often offer lower interest rates on balance transfers. While that’s fine and dandy, you’ll want to find out how long the low interest rate is in effect for. Ideally, you’ll want to aim to pay off your credit card debt in full during this time. If that’s not realistic, find out the interest rate you’ll pay once the promotional period is over to make sure it still makes sense.
Likewise, you’ll want to find out if there are any fees for balance transfers. Often credit cards will tack on a fee of one or 2% of your outstanding balance simply for transferring your credit card debt from your old cards to the new credit card. Do the math ahead of time and make sure it’s worth it with the fee. The last thing you want is to do a balance transfer and be worse off financially.
Are Rewards Cards Worth It?
The main benefit of reward credit cards is that you earn rewards just for making your everyday purchases. For example, some cards offer rewards of 1% or more of the value of your purchase. Rewards come in many shapes and sizes from reward points to cashback. If you’ve got the travel bug, you might consider signing up for a travel rewards credit card, where you’ll earn points towards travel.
Rewards points are great if you don’t let your spending get out of control. Buying goods and services on your credit card just for the sake of earning reward points isn’t a good idea, unless you really need the good or service. Remember that there’s no credit card in the world where it’s worth earning rewards only to carry a balance and pay 19% in interest on your credit card.
Visa, Mastercard, Amex or Discover: Which Is Best?
Trying to decide which credit card to sign up for? There are four main credit card companies: Visa, Mastercard, Amex and Discover. Before signing up for a credit card, you’ll want to assess it based on several factors including interest rate, fees and reward points.
To maximize your reward points, it doesn’t hurt to do a spending audit. Review your spending over the last six months to see the spending categories you spent the most in. Based on that, you can choose a credit card that makes the most sense. For example, if travel is important to you, you might want to choose a travel rewards credit card, but if you regularly carry a balance, you probably want to choose a credit card with a lower interest rate.
By taking the time to review your spending, you can find the credit card that’s best suited for you.
Low Fee Credit Cards
Sometimes credit cards come with annual fees. Low fee credit cards refer to those with low or no annual fees.
When shopping for a credit card, be sure to ask about annual fees. If a credit card has an annual fee, you’ll want to do the math ahead of time to make sure it’s worth it. Sometimes it’s worth it because you’ll earn a lot of rewards, but other times it may not be worth it. By finding out the annual fee ahead of time, you can make an educated decision before signing up for a credit card.
Student Credit Cards
If you’re a student, you might want to consider signing up for a student credit card. Student credit cards tend to come with lower interest rates and rewards geared towards students. A student credit card can be a great way to build your credit if you use it responsibly. That means paying off your balance in full each month.
However, if you end up racking up a lot of debt, even if your parents bail you out, student credit cards can do more harm than good. Make sure you’re prepared to use one responsibly before signing up.