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.
IRS Debt Relief
Tax time is stressful for many Americans who end up owing money to the IRS. Tax debt is nearly impossible to discharge in bankruptcy court. The IRS can attempt to collect this type of debt for ten years after the date of assessment. In the meantime, you may have your wages garnished, your bank accounts seized, and your credit ruined.
Fortunately, IRS debt relief is a viable option for many people who owe back taxes. Many tax debt relief companies make big promises. These companies may charge hefty fees, take ages to get your tax problems solved, or simply fail to do what they said they'd do.
What is Tax Debt Relief?
If you can't afford to pay the taxes you owe the federal government, you have a few good options for IRS debt relief. You may be eligible for a payment plan or even a debt settlement (called an offer in compromise) that could protect you from wage garnishment and other aggressive collection tactics.
The faster you act, the more options you have for IRS debt relief. Even if your tax debt is years old, don't give up. You may have to pay penalties and interest, but it's better to face the problem head-on and avoid the problems that come with having your bank account frozen or your credit wrecked.
The IRS can also legally put a lien on your property, preventing you from selling it before you pay your tax debt.
Penalties for Paying Taxes Late
The IRS charges several types of penalties and late fees if you fail to pay your taxes on time. Here are some reasons that the IRS may attach penalties to your tax bill:
- Failure to pay: If you don't pay your taxes in full by April 15 of the year you file
- Failure to file: If you don't file your tax return by April 15 and you don't ask for and receive an extension
- Failure to pay proper estimated tax: If you expect to owe more than $1,000 in taxes and you don't pay your taxes through withholding or you don't pay your quarterly tax estimates throughout the year
Penalties and interest rates vary. For example, if you fail to pay your taxes on time, you can expect a penalty of 0.5% of your total tax bill each month until your debt is paid in full.
If you fail to file your taxes on time, you'll be charged 5% of your unpaid taxes every month for up to five months, plus a late filing penalty of $100 to $435, depending on when the tax return was due.
If you fail to pay proper estimated taxes, you'll be assessed quarterly penalties calculated using the formula in Publication 505.
Reducing the Total Amount of Money Owed to the IRS
You may be able to reduce your total tax debt by contacting the IRS and asking for an offer in compromise. This allows you to settle your debt for less than the total amount owed. Many tax debt relief companies offer this service for a fee, but it's something you can do on your own with just a phone call.
If you choose to make an offer in compromise, you'll be charged an application fee of $205. You may not have to pay the fee if you qualify for a low-income certification or if you submit paperwork stating that you dispute your liability for the debt.
Before you can get approved for an offer in compromise, you must be up to date with your yearly tax filing and any required estimated tax payments. To see if you are eligible, use the offer in compromise worksheet from the IRS.
If you want to submit an offer to the IRS to settle your debt in full, you can do so by submitting your offer using IRS Form 656-B.
Setting Up a Payment Plan with the IRS
The IRS may allow you to pay off your tax debt over time with a payment plan. They must approve the agreement, though. You can request a long-term payment plan by applying online if you owe less than $50,000 in tax, penalties, and interest and you've filed all of your required tax returns.
There's a $31 setup fee unless you meet the low-income requirements. If approved, you'll pay monthly through automatic withdrawals from your checking account. If you want to make monthly payments that aren't automatically withdrawn, your setup fee is $149.
If you have tax debt, it's smart to handle the problem as quickly as possible to avoid fees and penalties. You don't need to hire a tax relief company to handle the problem for you.
In most cases, tax relief agencies make phone calls and fill out forms that an individual could handle on their own through the IRS for free.