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.
How to Build an Emergency Fund
When the next financial emergency happens, will you be prepared? That’s the question you should be asking yourself right now. Sure, you can buy all the necessities like food and toilet paper, but another way you can protect yourself financially is by having an emergency fund.
In this article we’ll look at how to build an emergency fund. We’ll cover the importance of having a security net for uncertain times, tips on how to save for one, what the fund should consist of and taking into account how risky or secure your occupation is.
The Importance of Having a Security Net for Uncertain Times
An emergency fund is a lot like insurance. You don’t realize you need it until something bad happens in your life. When that "something bad" does happen, you’ll thank your lucky stars that you have an emergency fund.
At the beginning of 2020, most people were aware of Coronavirus, but didn’t see it as a big threat. This was a virus that was mostly in Europe and Asia. Why should we worry? But this suddenly changed. Fast forward to March of 2020 and many non-essential businesses are closed. This has put a lot of people out of work. Sure, the government may be providing some financial support, but in a lot of cases it’s simply not enough.
In light of COVID-19, many people are now worrying about rent and mortgage payments. Worrying about money is never fun. It’s stressful enough when you’re on your own, but it’s even more stressful when you have a family to take care of. This is where a financial "security net" can come in handy.
A security net, otherwise known as an emergency fund, is savings you put away for a rainy day. These savings are designated to cover any future mishaps and unexpected expenses. In terms of future mishaps, this could be getting laid off from work or being too sick to work. Sure, there’s insurance to protect you, but insurance often only pays you a portion of your regular paycheck; that’s when having an emergency fund can come in handy.
There are also the unexpected expenses. Examples of unexpected expenses include your car breaking down, your roof needing repair from a surprise windstorm or your child needing orthodontics.
Without an adequate emergency fund, you’ll find yourself going into debt to pay for these expenses. If you have to charge these emergency expenses on your credit card, this will only add to your stress level. By having an emergency fund, you could dip into it during times of need and avoid racking up high-interest debt.
Tips on How to Save for an Emergency Fund
My best tip is to save ahead of time for a financial emergency. By the time the next emergency happens, it will be too late. If you don’t already have an emergency fund, start putting some money away today.
How much money should your emergency fund have? It depends on how stable your job is (more on that below). Financial experts recommend keeping between three and six months’ living expenses in a high-interest savings account.
But coming up with three to six months’ living expenses all at once is tough. Luckily, you don’t have to. If you don’t have an emergency fund or you don’t think your emergency fund is sufficient, start saving right away.
Put away whatever money you can afford from each paycheck towards your emergency savings. It may be $200, $100 or even $50, but at least by doing that you’ll be building up an emergency fund over time.
Make your savings automatic. Have it so the money is automatically put into a separate savings account when you’re paid at work. You’ll barely notice the money is gone and you’ll be less likely to be tempted to spend it.
Likewise, set up a separate savings account for your emergency savings. This is a far better approach. Don’t combine it with your savings account for your vacation. The last thing you want to do is deplete your emergency savings account to go on a family trip, only to come back and find your basement flooded at home.
What Your Emergency Fund Should Consist of
Financial emergencies often come up out of the blue. For that reason you want an emergency fund that’s easily accessible. Most people would be well-served by stocking away their emergency savings in a high-interest savings account. Not only can you earn a decent interest rate, the money is easily accessible when you need it most (highly liquid). It’s best to stay away from the stock market for your emergency funds. The last thing you want is for the stock market to crash and the value of your investments to plummet, leaving you with not enough money to take out in an emergency.
What your emergency fund should consist of depends on your income, lifestyle and size of family, among other factors. If your employment situation is unstable, you’ll need a more sizable emergency fund. If you live a lavish lifestyle and don’t want to scale it back when times are tough, you’ll need a larger emergency fund. If you have a big family, you’ll need a larger emergency fund. Are you seeing a trend? You get the picture.
How Risky or Secure Your Occupation Is
Something else to consider when building an emergency fund is how risky or secure your occupation is. In a recession, how secure would your job be? If you’re a full-time permanent salaried employee with the government, you probably have less to worry about than someone working in the hospitality industry. Although even if you work for the government, your job isn’t necessarily 100% secure. A shortfall in the government budget or a change in government could mean you’re out of a job, so it’s always a good idea to plan for the worst and have an emergency fund, even if you think the chances of this happening are slim.
Likewise, if you’re in an industry like hospitality or the airline industry that could be severely impacted by a downturn in the economy, you’ll certainly want to make building an emergency fund a top priority. Your job may be stable right now, but who’s to say it will be stable over the next year, six months or even three months?
How to Build an Emergency Fund: the Bottom Line
Recessions can often happen fast. You may think you have enough time to put money away if you anticipate you could be laid off in the coming months, but sometimes things can happen really quickly with little warning (like the recent Coronavirus pandemic). It’s better to plan ahead rather than being caught off guard the next time a financial emergency happens. Now that we've gone over how to build an emergency fund, you can see that's it's not a complicated task, just one that requires a fair bit of discipline and smart planning.