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.
Get Your Finances in Order
Creating a personal budget may seem complicated, but it doesn’t have to be. A budget helps keep your spending in line and it helps meet long-term goals. In this article, we’ll look at how to make a personal budget. We’ll cover analyzing your spending, income versus expenses and how to divvy up your payments, among other things.
How to Begin Analyzing Spending
Before you make a personal budget, it helps to analyze your spending. By analyzing your spending, you can see where all your money is going. Thankfully in today’s increasingly cashless society, analyzing your spending is easier than ever before. The simplest way to analyze your spend is to review your credit card statements, bank account statements and receipts.
If you’re like most people and you use your credit card most of the time, this may be your one and only step. Many of us get into the habit of blindly paying our credit card statements without taking the time to review our expenses line by line. By taking the time to review each and every expense line of your credit card statement, you could not only spot possible fraud and duplicate charges, but also get a good snapshot of where your money is going. For example, spending $5 here and there on coffee may not seem like a lot, but when you realize that you’re spending $150 a month on the “occasional” coffee, it can be a real eye-opener.
Once you’ve reviewed your credit card statement, you’ll want to shift your focus to your bank account statements. Even if you don’t use your debit card a lot, reviewing your bank account statement is an important second step. Most of us have bills automatically coming out of our bank account (some companies don’t let you charge some bills on your credit card). For that reason, you’ll want to review your bank account for charges. This will remind you of any expenses you may have forgotten about. It will also give you a good idea about how much money you have coming in on a monthly basis (remember that your paycheck is after tax, not before tax).
The last step may not be necessary for some, but if you find yourself using cash to make purchases on a regular basis, you’ll want to get into the habit of holding onto receipts, if you aren’t already doing so. To make things easier, you can create a file folder of receipts in your filing cabinet at home. Once a month you can add up and categorize your receipts. For example, you can create a category for food, transportation, entertainment, etc.
By taking the time to review your credit card statements, bank account statements and cash receipts, you can truly analyze your spending for the last few months.
Income versus Expenses
In a budget, you have income and expenses. Simply put, income is any money that you have coming in, while expenses is any money you have going out.
All things considered equal, you tend to have less control over your income versus your expenses. If you are a full-time permanent salaried employee, you can pretty much rely on your paycheck. However, for those who work on commission, your paycheck is determined based on how you perform, making it more difficult to budget.
If you find that your income isn’t enough, there are things you can do to boost it. For example, you could get a part-time job or take on a side hustle, such as writing or photography.
When budgeting, remember to use your after tax (net) income instead of your before tax (gross) income, since household expenses are paid with after tax dollars.
When compared to income, we tend to have a lot more control over our expenses. Expenses can be divided into two broad categories: fixed and variable expenses. Fixed expenses are expenses that generally stay the same on a monthly basis — for example, your mortgage payments, home insurance and gym membership. Meanwhile, variable expenses can change on a monthly basis. Examples of variable expenses include water, heat and hydro.
By reviewing your fixed and variable expenses on a regularly basis, you can make sure you’re getting good value for your spending. If you find you’re spending more than you make, that’s a problem. You can take corrective action and adjust your spending to bring it back in check, so you’re not running a deficit on a monthly basis.
How to Divvy up Payments
Instead of just lumping all your expenses (payments) into two broad categories, fixed and variable, it helps to further divvy them up. You can divvy up your payments however you like, but I find it helps to have spending categories. For example, you can have spending categories related to your home, including mortgage, home insurance, utilities, repairs and maintenance. Outside your home, other spending categories you might have include groceries, transportation, dental, medical, clothing, gifts, restaurants, travel and more.
When creating a budget, instead of simply saving whatever money is left over, it helps to make savings a priority. You can do that by allocating a portion of your income to savings. Rather than just creating a broad savings category, it helps to create savings subaccounts with specific purposes — for example, an emergency fund, family vacation, down payment, etc. By treating savings as a priority, you’re more likely to meet your savings goals.
Likewise, it’s a good idea to allocate a portion of your paycheck toward debt repayment. Whether you have student debt, a line of credit, car loan, mortgage or credit card debt, by allocating a portion of your income in your budget toward paying those off, you’re more likely to have money left over after you’ve paid all your bills to actually make those debt payments.
Once you’ve divvied up your paycheck between payments and savings, ideally every single dollar will be allocated. It’s okay if you have a $100 surplus, but ideally your budget will be equal to nil. However, if you find that there’s a deficit, you can adjust your budget to bring your spending in line.
How to Make Spreadsheets for Tracking
To make the most of your budget, it’s important to track your spending. Tracking your spending involves comparing the amount you have budgeted for a category against the actual amount you spent. If your spending is the same, you’ve come in on budget. If your spending is less, you’ve come in under budget. However, if your spending exceeds a spending category, you’ve come in over budget. If you do that on a regular basis, you’ll either need to reduce your spending in that category or increase the amount you have budgeted toward it.
It helps to use a spreadsheet to keep track of your expenses. A spreadsheet doesn’t have to be complicated. Start by listing out all the budget categories mentioned above. Next, you’ll want to create three headings: estimate, actual and difference. Estimate is for the amount you’ve budgeted for a spending category, actual is how much you spent in a spending category and difference is the difference between the two. As previously mentioned, ideally you’d like it to break even or be a surplus. If you have too many deficits in spending categories, you’ll come in over budget and not meet your savings and debt repayment goals.
What Should You be Aware Of
A budget isn’t worth the paper it’s written on if you don’t use it. Get in the habit of regularly reviewing your budget and making adjustments when necessary. By doing that, you’re more likely to stay on budget and meet your savings and debt repayment goals.
How Can You Allocate Money Appropriately?
Allocating money appropriately is key if you want your budget to be as accurate as possible. You can allocate money appropriately by doing the first step in this article. By analyzing your spending, you can see how much to realistically set for various spending categories in your budget, rather than simply plucking numbers out of thin air. This in turn will help ensure your budget is as accurate as possible.
By doing the work up front of analyzing and tracking your spending on a regular basis, you can get the most out of your budget by ensuring it’s the most accurate possible.
How to Save in Certain Areas
For most families, the big three categories are shelter, food and transportation. By looking for ways to save in those areas, you can boost your overall savings rate. If you could save 5 or 10% in each of those spending categories, you could come up with an extra $100 per month or more. Not bad!
In terms of shelter, it’s a good idea to create a mock budget before you move into a place. List what all your expenses would be outside just the mortgage or rent. Examples of expenses include utilities, home insurance, repairs and maintenance. By doing that, you’re less likely to be blindsided by costs later on. You’re also less likely to find yourself in a situation of being “house rich, cash poor,” with all of your money going toward your shelter costs and little money to save, let alone have fun.
You can save money on food by cooking at home more often and dining out less. You can do this by cooking your meals in advance for the week, so you’re less likely to rely on fast food on those busy weekday evenings. Likewise, instead of buying your groceries at premium supermarkets, shopping at discount supermarkets will allow you to purchase food that’s often just as good quality for a lot less.
Saving money on transportation largely depends on the makeup of your household. For example, if you have children, taking the bus everywhere probably doesn’t make sense; but perhaps instead of owning two cars, you might be able to get away with owning only one. But if two cars are a must, you can try to stretch your vehicle buying dollar further by purchasing a two- to three-year-old used car from a registered car dealer instead of driving a shiny, brand-new car off the lot and having it lose half its value during that time.
These are just a few creative ways to save money. I’m sure you can come up with your own.
What to Focus On: Paying off Debt in a Realistic Way
If you have high-interest consumer debt, such as credit cards, you’ll want to focus on getting that paid off sooner rather than later. If you’re only paying the minimum payment, not only will it take you a long time to pay off, it will cost you a boatload of interest.
When setting a budget, similar to dieting you want to make sure it’s realistic. If you set a budget that’s too strict, you’re setting yourself up for failure. If you want to pay off your debts sooner, you’ll need to find extra ways to earn income, cut your expenses or both.
Again, make sure they are realistic and sustainable. If you’re working a nine-to-five job, working until midnight every night in retail probably isn’t realistic, but working a couple evenings a week until 9 p.m. might be.
Likewise, saying that you’ll spend nothing on entertainment probably isn’t realistic, but making plans to skip the movies once a week and watch a movie at home probably is.
With the extra money you save, you can put it toward debt repayment and reach your goal of debt freedom sooner.