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 Credit
Your credit history is a collection of information about your credit cards and loans. Potential lenders, banks, insurance providers, landlords, and even employers can use this information (or parts of it) to determine whether to engage in a business relationship with you.
If you have negative reports in your credit file, such as unpaid damages to a home you rented, late credit card payments, or collection activity on debts you failed to pay, you may have a hard time getting a loan or credit card. Negative reports in your credit file could mean that you'll pay more interest, higher insurance rates, or have difficulty finding a place to rent.
If this is the case, then it’s important for you to start building a more positive credit score. If you’re finding yourself Googling “how to build credit” you’ve come to the right place. In this article, we will look at how to build credit, and why it’s important to do so.
Why is Building Credit Important?
If your credit file doesn't have any negative information, you may have an easier time getting a low interest rate on a credit card. It could be less expensive to get a mortgage or auto loan.
Building credit is one way to show potential lenders, landlords, employers, and insurers that you are trustworthy. Having good credit provides evidence to a business that you will pay your bills on time in the future.
Strategies to Help You Build Credit
Many lenders use the FICO scoring model to determine whether to lend money or extend credit to a new customer. According to Experian, there are general ranges within the FICO credit scoring model that can help you understand how you may be rated by potential lenders.
- 800-850: Exceptional
- 799-740: Very Good
- 670-739: Good
- 580-669: Fair
- 300-579: Very Poor
There's more to your credit profile than your FICO score, though. The information in your credit file about how much you owe, how many accounts you own, whether you've made late payments, and whether you have accounts that have been turned over to collection agencies are important to lenders.
Even if your credit score is "good," having a number of recent late payments in your credit file could make it difficult for you to get approved for a credit card.
Types of Credit
What is it: You may not have "bad credit" but if a lender tells you that your credit file is thin, or you haven't established a credit history that includes enough information, you may be unable to get a loan or credit card.
How to fix it: Consider opening a secured credit card. Secured cards can be expensive, so research your options. Choose a card with low interest and no fees. It's a good idea to look for a card that automatically transitions to an unsecured card after you make a certain number of on-time payments. Talk with your bank or credit union about credit building programs. They may be able to extend a small personal loan or low-limit credit card to help you create a positive payment history in your credit file.
What is it: If your credit score falls in the range of 669-739, you have decent credit and you may have access to a wide range of credit cards, personal loans, mortgages, and auto loans. You still have room for improvement and working to build your credit and raise your scores will help you get even better terms when you apply for loans and credit cards.
How to fix it: Check your credit types. If you have five credit cards, adding a small personal loan, auto loan, or mortgage to the mix will help you diversify your credit types and may boost your score. Make sure you make every payment on or before the due date. Set up automatic payments to help you stay on track. Making even one late payment on an account that reports to the credit bureaus could drag your score down into the "fair" or "very poor" ranges.
What is it: With bad credit, you may have a hard time qualifying for credit cards and loans. If your score is below 579, lenders may deny your application because you pose a risk of default.
How to fix it: The most effective way to build your credit is by making every payment on time. Focus on the accounts that show up in your credit report. Even if you have late payments in the past, new information "weighs" more in the FICO scoring model's algorithms.
Checking Your Credit Score
Before you can build credit, look at the information inside your credit files. You can access your three credit reports with Experian, Equifax, and TransUnion at no charge once every 12 months.
Visit AnnualCreditReport.com to get access to your credit reports. Check them carefully for mistakes. If you notice accounts you don't recognize, missing information, or other errors, alert the credit reporting agency. They can help you get those errors fixed.
Your credit report and credit score are an important part of your total financial health. Understanding the information in your report and strategically opening new accounts while you make 100% of your monthly payments on time is the best way to build credit.