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.
You Can Do It
For some, getting into credit card debt is a heck of a lot more fun than getting out of it. Others face emergency situations that require large credit card purchases, or worse yet, cash advances. However, there are strategies available to pay off credit card debt that do indeed work.
Read on to learn how to pay off credit card debt and then keep it from recurring.
What Is Credit Card Debt?
Credit card debt is money you owe for purchases you made and cash advances you took using your credit card. Unlike a debit card that immediately uses the money in your checking account, credit cards lend you money that you must repay over time.
In most cases, it is unsecured debt, which means you posted no collateral to the card issuer before getting the card. (However, folks with poor credit can obtain a secured card collateralized by money in a bank account.) It is also revolving debt, meaning you can use and reuse the card up to the credit limit without reapplying for a new loan. The card account remains open for as long as you want it, unless the issuer revokes the card for some reason.
How Do People Get Into Credit Card Debt?
Credit card debt is simply any balance you don’t repay in full before the start of the next billing cycle. There is nothing wrong with credit card debt per se; in fact, credit card debt is one of the great conveniences of credit card usage. It allows you to space out payments over a period of months so you can buy otherwise unaffordable goods and services. Credit card debt becomes a problem when the total balances on all your credit cards is relatively large compared to your income and savings.
You can run up sizable credit card debt on a single card if it has a high credit limit. Alternatively, you can mound up debt by running up the balances on several different credit cards. Normally, card issuers consider your income, indebtedness and credit score when establishing the credit limit on your card. However, if you have a good score, the card issuer may give you a very generous credit limit.
So, in a nutshell, credit card debt builds up when you spend more than you can repay before the next billing cycle. The minimum payment due is a small fraction of your card balance (typically 5%). If you regularly pay the minimum, your balance can balloon quickly, leaving you mired in debt. In addition, credit card interest rates are notoriously high (after any introductory rates expire), which can double the cost of purchases over time if you make only the minimum payment each month.
Different Strategies for Successfully Paying off Credit Card Debt
The first thing to do is stop using your credit cards until you pay off your debt. As the saying goes, when you’re in a hole, stop digging. Use cash, checks or a debit card for your purchases.
Next create a repayment plan. Decide how much of your monthly income you can devote to card repayment and which of your cards (if you own multiple) will receive the bulk of the money. Pay the minimum amount on your other cards until the first one is repaid, and then repeat for the second card on your list.
Here are some strategies you can employ to pay off your debt:
The Snowball Method
In this method, you first pay off the card with the smallest balance. After you’ve dispatched that card’s debt, move on to the next card with the smallest balance. Continue until you’re out of debt. This method can give you the confidence to stick to your repayment plan because it lets you pay off the first card relatively quickly.
The Avalanche Method
Using this method entails first paying off the card with the highest interest rate. Work your way down the card roster until you pay off the one that charges the least. The avalanche method saves you the most in interest and will get you out of debt faster than the snowball method. However, it might seem like it’s taking longer to see progress. If that’s a problem for you, stick to the snowball method.
Consolidate Your Credit Card Debt
Another method that can work well is to transfer the balances on all your credit cards to a new card that charges no interest on transfers during the introductory period. Note that you’ll likely pay a one-time fee, usually around 3%, for each transfer. Consolidation has the virtue of simplicity, as you won’t have to juggle multiple minimum payments and due dates each month. Some cards have introductory periods of up to 18 months for 0% balance transfers.
Use a Personal Loan or Home Equity Line of Credit
This is another way to consolidate your credit card debt. You’ll save the balance transfer fees of the previous method, but you might pay that much and more in interest.
Negotiate a Debt Settlement
If you owe a lot of money, your creditors might be willing to accept less than full repayment. You can use a legitimate debt relief service to help you.
File for Bankruptcy
This is the nuclear option, because it will ruin your credit score for seven years or longer. Chapter 7 bankruptcy requires you surrender some property. Chapter 13 lets you keep your property. Consult a lawyer and carefully consider the consequences before proceeding.
How to Avoid Credit Card Debt in the Future
Here are some tips to avoid future credit card debt:
- Create and adhere to a realistic budget. Track your spending each month and don’t overspend.
- Use only one card and put away the rest. Don’t close credit card accounts, because it can hurt your credit score. Pay your balance in full each month.
- Use cash or a debit card instead of a credit card. This alone might discourage you from making impulsive purchases.
- Use specific savings accounts for anticipated big-ticket purchases. Save until you reach your goal, then make the purchase with cash.
- Establish a fund to help you avoid debt should an emergency occur. The fund should be large enough to pay three to six months of expenses.