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.
The Good, the Bad and the Ugly of Credit Scores
When people think about credit scores, the first thing that typically comes to mind is whether it is good or bad.
After all, having good credit score pretty much ensures you’ll be able to borrow from lenders for big ticket purchases like houses and cars. A good credit score can even be useful in helping you obtain certain jobs.
On that same note, having a bad credit score could result in financial misery. Qualifying for loans may be impossible unless you are willing to take on burdensome issues, such as higher interest rates or more substantial down payments. If you want to hold a financial job, a bad credit score could doom your chances.
For these reasons, and more, it’s imperative that you understand how to check your credit score. This includes knowing:
- How credit scores are calculated
- what resources are available to help you with credit issues
- How to choose these resources based on their pros and cons
Here, each of these issues are addressed. The goal is to arm you with as much information as possible so you can achieve and maintain a solid credit score.
Credit Score Defined
Credit scores are simply three-digit numbers that indicate your propensity to pay your bills on time. The main people or outfits are those who loan you money, such as banks and credit card issuers (your credit card debt could factor in, for example).
There are several types of credit scores with the most common being the FICO score. The other is the VantageScore, which was created by the three major credit reporting agencies.
Both use software to analyze your credit report to generate a credit score. The scores give an indication of the likelihood that a person will fall at least 90 days behind on a bill within the next 24 months.
The scores can be surprisingly accurate in reflecting how likely a borrower is to pay their debt obligations as agreed with the lender.
FICO scores are provided by the three major credit bureaus: Experian, Equifax and TransUnion.
How Credit Scores Are Calculated
While you may be keen on the importance of having good credit, you may not understand all that goes into calculating your credit score. It’s about more than you paying your bills on time. There are a variety of other factors that go into calculating your score.
The score has traditionally been calculated based on the information your creditors report about your payment history. Other information includes the amounts of your outstanding debts, and the length of your credit history.
Over the past several years, more lenders are using scoring models that include other factors to determine your credit worthiness. For example, some mortgage lenders may look at your apartment rental and utility payment histories. Your history of paying your mobile phone bill could even be considered to help you obtain credit.
Don’t Take Those Three Digits for Granted
So-called base FICO scores range from 300 to 850. It also has an industry-specific score range from 250 to 900. For example, it tailors scores for the auto lending business.
The first two versions of the VantageScore range from 501 to 990. The updated version uses the same range as FICO — 300 to 850.
No matter if you know your credit score is low or high, you should know your exact number for each of these. This is because there can be erroneous information on your credit report that could easily keep you out of the “good credit” group.
Experian provides the following credit score ranges:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Excellent: 800-850
Knowing your exact credit score can help you avoid being turned down for loans that you don’t stand any chance of receiving approval for. You can narrow down your options, and hone in on those that are best suited for your credit situation. This is extremely important when you want to make big-ticket buys, such as for a house.
Your low credit score may not prevent you from qualifying, but you’ll likely have to endure some stricter terms. This includes paying higher interest rates or making a larger down payment than you would if you had better credit.
Getting Your Hands on Your Credit Report
There was a time that getting your hands on your credit report was a chore. Not only did you have to contact the individual credit bureaus, but you may have had to pay a fee.
Thankfully, those days are over. There are a host of ways to get your credit reports, as well as alerts when your score moves higher or lower. Many of the services are free.
Among the most popular options are Credit Karma and AnnualCreditReport.com. For a fee, you can get your report and credit-related services at MyFico.
Credit Karma has emerged as a leader in the business of free credit reports. Despite its wild popularity, Credit Karma has a few catches.
Pros of Credit Karma
Let’s take a look, starting with Credit Karma’s pros. The pros include:
- It’s free – well sort of
- It provides alerts when your credit score moves higher or lower
- It features a tool to submit complaints when you find errors, which eliminates the need to go to each bureau
- It makes credit card suggestions based on your credit profile
Cons of Credit Karma
Now to Credit Karma’s cons. The cons include:
- It only provides free credit reports from two of the major credit bureaus: TransUnion and Equifax
- It bombards users with ads for financial products, such as credit cards
- It uses the information from your credit profile to make its recommendations (for credit cards, for example). If you have privacy concerns, this may make you cringe.
- It is paid based on you signing up for one of the offers it promotes on its site, which has raised concerns about its integrity.
Pros and MyFico
MyFico’s pros vary based on the plan you choose. They include:
- It provides paid plans that provide reports from all three major credit bureaus
- It does credit monitoring
- It provides FICO Score alerts
- It provides identity theft monitoring, alerts and dark web surveillance
- It provides fraud resolution and up to $1 million ID theft insurance
Cons of MyFico
MyFico’s cons include:
- It has monthly fees that range between $19.95 and $39.95
- Reviewers complain that the services, such as monitoring, aren’t worth paying for when they are offered for free at other sites
- Also check with your bank. Many of them offer credit monitoring services.
At AnnualCreditReport.com, you are entitled to just one reporting. However, you get the reports from all three bureaus.
Scam Alert: We Can Fix Your Credit!
Many who hear the phrase “credit repair” think it means paying someone to make negative information on their credit reports disappear. There’s no way to have legitimate debts removed from your credit report, no matter what a service many proclaim.
However, if there are erroneous items on your report that are dragging your score down, there are professional services that can help. Visit the CFPB’s site for reputable services.
You can also go it alone by contacting each of the credit bureaus and filing a formal dispute. Your filing should be very detailed. Include specifics about the error, and attach any supporting documents.
Wrapping It All Up
Having bad credit is not the end of the world. However, cleaning it up is quite an effort. This is why understanding the nuances of your credit score and credit report are so important. Don’t take either lightly.