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.
Understanding Financial Forecasting for Small Business
If you run a small business, you’ll need to get comfortable with finances. Although you may not be a financial guy or gal, like it or not, your small business’s finances are critical to its success. While knowing where your small business stands financially is handy, something else that can help your small business be even more successful is financial forecasting.
In this article we’ll look at the importance and benefits of using financial forecasting for small business. Once you gain a better understanding of what financial forecasting is and why it matters, next we’ll look at the most useful financial forecasting options out there.
The Benefits of Using Financial Forecasting
Financing forecasting for a small business isn’t a requirement, but it’s highly recommended. Unlike big businesses, small businesses don’t have endless financial resources. One bad decision and it can mean the end of a small business. That’s why it’s so critical to accurately forecast a small business’s finances.
Not only do banks require it in order to get financing, it serves as a road-map of sorts to help guide your business into the future and help determine which new business ventures are worth pursuing.
In a nutshell, financial forecasting looks at the current internal information of your small business as well as external economic information. This is then processed through a financial calculation. These financial calculations are critical.
They help figure out how profitable a potential expansion of your small business may be.
The Most Useful Financial Forecasting Options
Now that we’ve explained the importance and benefits of using financial forecasting for small businesses, let’s look at a few of the most useful financial forecasting tools. You can choose to use some of these, all of these or none of these. The choice is yours. Some of these financial forecasting options will be more useful than others depending on the industry you operate in.
1. Cost of Capital
Financial forecasting for cost of capital looks at the interest rates your small business pays on debt or equity financing versus the present or future operations of your business. The capital asset pricing model and weighted average cost of capital are two financial forecasting tools used by small businesses to compare interest rates of financing. These financial forecasting tools use the going rate or market cost of debt and equity (usually prime rate) to figure out if a company should use outside financing or not when deciding whether to accept a new business venture.
2. Net Present Value
The net present financial forecasting determines your small business’s future cash inflows from expansions of your business or new business ventures. Theses cash inflow amounts are then discounted back to the value of money today.
The discount rate you use for your small business is typically a rate of return, figured out in advance, that your company wants to get on any new business ventures your business undertakes. The typical rate used by businesses is between 10 and 12%, although it may be adjusted down based on the industry your business is in and the fact that we’re in a low interest rate environment thanks to COVID-19.
After you add up the amount of the discounted cash flows for your small business, next you compare it to the original cash outflow to start any new business ventures or expand existing operations. If those future cash flows are greater than your small business’ beginning cash outflow, it’s considered a good opportunity worth further investigation.
3. Financial Statement Analysis
This is probably the most basic type of financing forecasting. It’s fairly common for companies to study and compare various financial statements during a set time-frame to figure out if there are any ongoing trends from your small business’s financial information. Examples of trends include higher or lower company sales revenue, the costs of goods or service, and your small business’s expenses found on your income statement.
Companies big and small also make use of financial ratios to analyze their balance sheet and figure out how good of a job they’re doing at earning value from use of their assets. Ratios show how good a job your small business is doing at meeting its short-term financial debts, making a profit from selling goods and service and earning capital from your assets.
4. Decision Forecasting
Although not as common, small businesses sometimes use financial forecasting to make decisions for the business. This is known as decision forecasting. Examples of financial models commonly used include game theory, supply and demand analysis, and decision trees.
To do this type of analysis, as the small business owner, you must look at various decisions you can make with respect to the operation of the business. The potential impact of the various decisions will be clearly spelled out in the forecasting models used.
If you’d like to take this financial forecasting further, you include a percentage for the likelihood of a decision forecast earning a profit. As a small business owner, you can then select the business decision that’s likely to lead to the highest profits.