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.
For many investors, picking and buying individual stocks is an integral part of the investment game. It can be fun choosing a company that has historically performed well or that is near to your heart and backing it with your hard-earned money.
However, sifting through the thousands of options available to you and picking the right stock — one that offers you a handsome return and keeps your money safe — can be difficult. Considering that choosing the wrong one could mean losing your entire investment, learning how to successfully pick stocks is an important skill.
Different Stock Options
If you are thinking about investing in stocks, you have many options at your fingertips. The right one for you, though, will depend on your own financial situation as well as the stock research you conduct before moving forward.
There are six stock types to choose from. These include:
- Common stock
- Preferred stock
- Company size
The two biggest categories of stocks are common and preferred. If you own common stocks, you will both share in the company’s profits and also have the right to vote within the company. These stocks also have the potential for much higher returns, though they are often more volatile, and while dividends are often available, they are not guaranteed.
Preferred stock, on the other hand, is a bit more stable. The stocks themselves aren’t as volatile, dividends are guaranteed and fixed, and shareholders are even more protected against bankruptcy or company liquidation.
Of course, as you know by now, if an investment is risky, the reward (return) is often higher. If an investment is lower risk, the return is usually reduced. This is the case with common and preferred stock, too: common stock is more volatile but typically earns more in returns, while preferred stock is safer but more of a long-term (and slow-growing) investment for shareholders.
What You Should Know Before Buying Stocks
Long before you ever click that purchase button, there are a few important things you need to know about buying stocks.
The first is that you don’t need to choose individual stocks in order to maximize your investment returns — this is a common misconception. Instead, opting for ETFs (exchange-traded funds) or index mutual funds might actually be a much better decision when starting out.
That’s because choosing these funds spreads your investment across a number of different stocks, instead of putting all of your proverbial eggs into one basket. That protects you against any number of events that could affect individual stocks, limiting any loss that you might have experienced.
Next, you’ll need to choose a broker or brokerage firm. This decision shouldn’t be made lightly, as it will impact you financially for a long time to come. This broker(age) will determine which investments you’re able to choose, the fees you’ll pay, and can even have an impact on the returns you’ll see down the line. Do your homework and choose wisely!
You should remember that volatility is the name of the stock market game. Your investment is not only subject to the natural ups and downs of our economy, but is impacted by industry changes, trends and even decisions made by the company itself. Mentally prepare for this, knowing that high risk and high reward typically go hand in hand.
How to Buy Stocks
So, you’re ready to buy your first stocks? Great! But where on earth should you begin?
Many investors enjoy the ease of online buying and selling, through companies such as E-Trade and Ameritrade. These sites usually charge lower commissions than in-person brokers or large brokerages, saving you quite a bit of money in fees over the years.
Of course, you can always buy or sell stocks in person, directly through a broker. Full-service brokers will be able to guide you through this process, not only facilitating a purchase but also conducting research and helping select the right stocks for you. Some brokerages offer in-person services in addition to online platforms where you can easily manage your portfolio.
Lastly, if you want to save even more in commissions and fees, you can opt to buy stocks directly from the company itself. Not all companies offer this option, but of those that do, this is much more affordable than using a broker to facilitate the sale. Of course, buying stocks direct also means you’ll need to do all of the research yourself, so decide first if you’re up for the challenge.
When Should You Purchase Stocks?
There is no perfect formula for determining when you should purchase a stock; if there were, we would all have very impressive portfolios, I would imagine.
However, there are a few instances when it makes sense to buy, especially if you were already watching a particular company’s stock. These include times when:
- You’ve done your homework and believe the stock is in a great place
- The stock hits your buy price
- The stock goes on sale
- The stock is determined to be undervalued
What to Avoid
In order to be successful in your investment journey, there are a few things you will want to stay far away from. These have the potential to trip up even the most seasoned investor — if you’re new to the game, though, it is even easier to fall into these traps.
Being Too Bold
In the beginning, you are probably eager and excited to start investing. But whether you have dreams of sniffing out the next Amazon or want to net a modest return on your savings, being too aggressive with your investments can derail your plans.
Instead, start low and slow until your portfolio builds (and is diversified), and until you feel more comfortable with your own investing prowess as well as that of your broker. This might mean choosing an ETF or mutual fund to begin, guarding you against volatility.
It’s impossible to invest without incurring some fees. However, the more you can limit these out-of-pocket expenses, the more money you’ll keep in said pocket.
Many brokerages will offer commission-free buying for mutual funds and/or ETFs. You can also shop around for reasonable fees on individual stock purchases, to reduce your annual expenses.
Buying Hot Stocks
We’ve all heard the stories of that one guy who jumped into the right trendy stock at the right time and made millions. And while this can certainly happen, odds are that once a stock becomes wildly popular, most of the “make millions overnight” potential is lost.
Take Bitcoin for example. It spent two years on a volatile roller coaster; at its peak, first-time investors everywhere were clamoring to get their hands on it. However, no sooner than many of these investors had bought in for the first time, the hot cryptocurrency tumbled, losing many people a lot of money overnight.
Do your research and find a broker you trust, rather than hopping onto the investing bandwagon with whatever’s hot at the moment.
Not Doing Enough Research
Before you go and put your hard-earned savings into any stock, you need to spend the time researching it. Check out the company with a fine-toothed comb first, evaluating P/E ratios, their debt and equity, and even the strength of the industry in which they perform. If there are whispers of national policy changes, up-and-coming competitors, etc. that could impact its performance, chances are you can find mention of this in your research.
By doing the adequate legwork beforehand, you could save yourself quite a bit of anxiety and money down the road.
Buying stocks for the first time can feel nerve-wracking, especially if you’re not really sure where to begin. Picking the right brokerage and then the right stock(s) can make all the difference in the world for your peace of mind and your wallet. Just remember to start slow and do your homework — you’ll be well on your way to a successful investment portfolio in no time.