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.
Budgeting for Young Adults: How to Become Financially Independent from Your Parents
Even though many American high schools now teach the basics of personal finance, most grads are ill-prepared for the real world.
There are a few different reasons why this version of personal finance education doesn’t work. Most kids don’t retain much of what they learn; they’re just there to pass the test and move on. Many assume the real world will be easy, since personal finance doesn’t seem like much more than basic math. They forget it’s the psychology of personal finance that’s the difficult part.
If you’re a young adult who’s struggling with your new real-world money responsibilities, or are a parent to one, this article is for you. Let’s take a closer look at how you can make your own budget and work towards becoming financially independent from your parents, including potential pitfalls you can’t afford to ignore.
Why Learn Now?
Many young folks have a similar attitude, especially when they’re in college. They’re worried about living life to its fullest, even if that means emerging from school with substantial debt. That’s a problem for their future selves. After all, college only comes around once. It’s best to maximize the experience.
But this attitude can impact your life for years down the road. Having student loan debt can affect everything from potential relationships to buying a house. You might want to pursue a career path that is more satisfying but doesn’t pay as much. Having a bunch of debt will make that much more difficult.
And then there’s the stress of having debt. If the economy tanks – like it is today – you’ll have enough to worry about without having to keep creditors happy. Having an emergency fund also helps in periods of economic uncertainty, and it’s hard to have that buffer if you’re also worried about paying off debt.
How Parents Can Help
Millions of American parents witness their adult children struggle with their finances, a number that would undoubtedly be much higher if these kids were completely honest about their financial picture.
Many parents help in a predictable way. They’ll simply cut a check to their child to help repay the debt. When the debt goes away, so should all the other problems associated with it.
But there are a few issues with this approach. It does nothing to address the underlying spending problem or other mismanagement that led to the debt in the first place. It also teaches a poor lesson. To really get the message, it’s much better to have children work through their money problems, rather than getting a bailout. I know many frustrated parents whose "one time" lifeline has turned into regular financial assistance.
Parents need to encourage their children to build successful money habits on their own. Once they’re confident that this new outlook has been cemented into place, then they can start giving financial rewards.
In the meantime, parents can still help in plenty of ways. They can offer to let a new graduate move back home to help them get a head start, for example. They just need to make sure their offspring are doing just that — working hard. They can offer to pay back the last 20% of their kids’ debt, a move that might give their children the motivation needed to succeed on their own. Or they can use a financial crisis as a teaching moment, cementing good habits right when they’re needed the most.
Learning these lessons is doubly important for children while they’re still at home. It’s a low stakes way to teach important financial rules that can have an impact for decades to come. Again, the same rules apply here. Parents should do their best to teach lessons, rather than simply throw money at problems. They can do things like rewarding their kids for getting a part-time job or making sure a portion of birthday money is saved.
How Young People Can Become Financially Independent from Their Parents
The part of budgeting that trips up most people is they don’t accurately separate needs from wants.
For example, you need a place to live. But the difference between spending $500/month on a bedroom with a shared kitchen and bathroom versus $2,000/month on your own luxury two-bedroom apartment is vast. It’s the same thing with food and transportation, the other big expenses.
I understand this can be difficult. Many newly graduated young adults are finally making a decent salary for the first time. They want to spend a little bit on luxuries after scrimping and saving for so many years. That’s okay, assuming your budget can afford it.
The key when making a budget is making sure you’re moving forward every month. That means putting money aside for savings and sticking to that plan. Many people have good intentions and then immediately rob the savings category as soon as something goes wrong.
One easy way to make sure you save is to pay yourself first. This is as simple as telling your bank to immediately transfer 10 to 15% of your paycheck to a savings account. Heck, you don’t even need to talk to anyone to make this happen. It’ll be an option in your online banking portal.
Maximizing your savings will ensure you pay off your debt and reach financial independence faster. The easiest way to do this is to relentlessly work at getting your three largest expenses down. Pick a cheap place to live. Take public transportation whenever possible, and if you can’t, settle on a reliable used car. The easy way to avoid spending too much on food is to pack your own lunch and eat dinner at home.
You might need to make some real sacrifices to really start getting ahead. Many 20-somethings simply can’t afford to live on their own in an expensive city. You might need to move somewhere smaller and cheaper. Or, you might have to start saying no when your friends want to go out. Lots of folks don’t want to make these tough decisions, so they suffer through years of debt and financial hardship.
The Bottom Line
In today’s tough COVID-19 affected economy, financial independence may seem like an elusive goal for a lot of young people. They can’t even find a job, never mind start to get ahead. But we will make it through this rough patch. There will be jobs waiting when the economy finally starts to reopen.
The choices made today can impact your life for years to come. A young person can choose to make smart decisions and relentlessly take steps to get out of debt (and build an emergency fund) faster. Or, they can take the easy route and continue to go backwards every month.
The choice is easy. Work relentlessly towards becoming financially independent from your parents. Your future self will thank you.