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 Save for Retirement without a 401(k)
401(k) plans make saving for retirement a lot easier and more convenient. The money is automatically set aside from your paycheck before you’re tempted to spend it. You also benefit from an immediate tax break. Your employer may even match your contributions if you’re lucky. But what if you’re not so lucky and don’t have a 401(k) plan?
The good news is that saving for retirement without a 401(k) plan is still possible. You’ll just have to put in a little more effort. But if you’re willing to put in that effort, it will pay off in spades by helping you save toward a comfortable retirement.
In this article we’re going to look at how someone can save for retirement without a 401(k) plan. We’ll look at what other savings options are available, pros and cons, what to look for and more.
Here are some other ways to save for retirement if you don’t have a 401(k) plan.
If you don’t have a 401(k) plan, your next best alternative is an IRA. IRAs come in two varieties: a traditional IRA and a Roth IRA. Both accounts work in similar ways with the main difference regarding how they’re taxed.
When you contribute to a traditional IRA, your contributions are tax-deductible up front.
Your money is able to grow tax-free until you’re ready to start making withdrawals in retirement. It’s at that point that you will finally pay income tax. Roth IRAs are the complete opposite: you’re taxed on the contributions you make up front, but you aren’t required to pay tax on any withdrawals you make in retirement.
Another key difference is the amount you can contribute to both. For traditional IRAs, you can contribute up to $6,000 annually ($7,000 if you’re at least 50 years old). With Roth IRAs, the amount you can contribute depends on your annual income. If you have a high household income, you may not even be eligible to contribute to a Roth IRA.
One of the main benefits of 401(k) plans is the ability to set up direct deposit with your employer. The good news is that there’s nothing stopping you from doing the same with IRAs.
If your employer doesn’t allow you to automatically contribute to an IRA from your paycheck, you can set it up so that you automatically contribute to your IRA from your checking account a day or two after your paycheck is deposited into your bank account.
If you’re having trouble funding your IRA, you can contribute some or all of your tax refund from the IRS to your IRA. That’s right, by completing a tax form with the government your tax refund could be automatically deposited directly into your IRA, helping you reach your retirement savings goal sooner.
Other Saving Options
If the IRA isn’t your cup of tea, here are a couple other savings options that are available.
Everyone needs emergency savings. If you’d like to earmark money toward retirement, but you’re afraid you might need it again soon, you might consider putting it in a savings account.
A savings account is a lot more accessible than an IRA. You can withdraw the money whenever you need it, but this can be a double-edged sword. You could find that you’re constantly using the money that you’re supposed to be saving for retirement for other purposes. To avoid a situation like this, it’s best to only keep a minimum amount of funds in your savings account.
Certificates of Deposit
Another savings option worth considering is certificates of deposit (CDs). CDs are a lot like savings account in the sense that they offer a similar interest rate and the government insures them. The main difference is that your money is locked-in for a specific period.
CDs may be as short as three months or as long as 10 years. If you’re saving for retirement, it’s probably a good idea to go with a longer-term CD, but at least you have the option of choosing a CD with the term that fits you best.
How Much Should I Save to Reach My Retirement Goals?
That’s a great question and it really all depends on when you’re planning to retire. All things considered equal, the sooner you start saving for retirement, the less money you’ll need to save. Similarly, the sooner you plan to retire, the more aggressively you’ll need to save. Unfortunately, there’s no magic number for everyone. Fortunately, doing the math isn’t too tough.
Start by figuring out when your ideal retirement date is. Once you have a goal in terms of when you’d like to retire, figure out the lifestyle you’d like in retirement. For example, are you okay with playing bridge on your front porch or do you want to go on cruises and travel the world?
Once you have your dream retirement in mind, try to put a price tag on it. Figure out how much you expect to spend in retirement. It can help to create a mock budget. Once you have your mock budget in hand, you can figure out how much you’d need to save from each paycheck in order to achieve your desired retirement date. It’s that easy.
Saving within Your Means
How much you need to save depends on the lifestyle you want for when you’re retired. If you plan to travel down south to Florida during the winter and travel to exotic locations during the summer, chances are your retirement is going to be pretty pricey.
It’s a good idea to ask yourself if you can truly afford a lifestyle like that in retirement because this will dictate how much you need to save during your working years.
A good rule of thumb is to aim to save between 10 and 15% of your paycheck beginning in your 20s. If you start saving later in life, you’ll probably want to up the percentage of your savings depending on the lifestyle you want to live in retirement.
If you’re finding your expenses are going to be too high once you’re retired, you might consider downsizing your home or scaling back your retirement plans. By doing that, you won’t need to save as much during your working years.