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.
Is Online Investing Safe?
These days, it seems like you can do everything online. And I, for one, am thrilled with this new world.
In the past few months alone I’ve used the internet to book everything from an oil change to a haircut to a round of golf. Millions of people (myself included) have met their spouses online. Social media and YouTube videos have become our new go-to versions of entertainment. And thanks to the miracle of online banking, I no longer have to visit the branch every time I need to pay the electric bill.
Investing is another thing that has moved from an in-person experience to something that’s done online. Millions of Americans have embraced a do-it-yourself investing approach using self-directed online brokers and cheap exchange traded funds (ETFs), eschewing the traditional path of entrusting a financial advisor with their retirement savings.
But is this really the best move? Is online investing safe for regular folks who are looking to grow their investments for a comfortable retirement? Let’s take a closer look.
The Different Routes
The biggest difference between investing online and through a traditional financial advisor is the amount of help you get through the process.
There’s a reason why investing with an advisor has been the default for many years. This professional is always there to answer investor questions. He/she can consult with smart folks when clients have complex issues, too. Investors can feel safe in such a scenario, since there are many layers of security. And remember, advisors are required to know their clients’ risk levels, which ensures a regular investor won’t accidentally stumble upon complex investments meant only for professionals.
There’s just one big problem with the traditional advisor method: these folks expect to get paid for all they do, which is usually in the form of higher expenses. Typically, financial advisors are paid in one of three ways: per transaction, a set fee every year or a trailer fee, which is a percentage of your investments.
Compare that to online investing, which doesn’t have anyone holding your hand. Fees are much lower, but you’re on your own. You’ll have to research individual investment choices yourself, and you’ll have no one to reassure you during the next market panic. For more experienced investors, this is hardly a big deal. But it could be massive for somebody just starting out.
A new breed of financial advisor has started to be popular, a hybrid of the two basic methods called a robo-advisor. Robo-advisors will choose a suitable slate of passive investments for you and has people you can talk to if you’d like the human touch. But don’t expect a robo-advisor to roll out the red carpet for you — they’re mostly automated. The good news is the efficiencies created are passed onto investors in the form of much lower fees, at least when compared to the traditional advisor route.
How to Invest Online
The process of investing online is a pretty simple one.
The first step is to open the account. This involves a pretty complex application form — which is mandated by regulators, but you can perhaps save some time by using your bank’s online broker, who will already have much of your info on file already — and some pretty invasive financial questions.
A few days after filling out the form, your account opening should be approved. The next step is then funding the account, which will be explained to you. I find the easiest option is usually sending money electronically back and forth, which is easy to set up for anyone familiar with online banking.
Once your account has cash in it, the final step is buying specific stocks or ETFs. Remember, this part is all up to you. You’ll have to tell the broker what stock to buy, how much to buy, and whether you want to pay the going price (a market order) or a specific price (limit order). The order won’t go through until you hit the buy button.
This may sound like a complex process, but it’s not so bad. Remember, there are millions of Americans with online brokerage accounts. If they can figure it out, you can too.
Which Route Should You Take?
You don’t have to worry about some fly-by-night online broker stealing your money. Each online broker is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The Securities Investor Protection Corporation (SIPC) also protects investors if their broker is ever forced to declare bankruptcy. Your money is safe from everything except your own boneheaded decisions.
In fact, some people argue a financial advisor is more likely to be a risk to your savings than any of the leading online brokers. Financial advisors have used a myriad of tricks over the years to milk excessive fees from naïve investors who made the mistake of trusting their advisor completely. Regulators do a good job stamping out these excesses, and investors can sleep well at night knowing most advisors are honest folks who want to help investors.
The biggest risk in embracing a do-it-yourself route by online trading is you’re likely to screw up a few times. This is especially true if you decide to pick individual stocks, rather than sticking to passive investments that track the underlying stock market itself. A loss of 20% might not seem like much today, but it can really make a dent in your net worth after a few decades of compound growth.
Remember, using an online broker means you’ll have to act as your own financial advisor. You’ll have to choose your own investing strategy, figure out any tax implications and then decide if a downturn is a buying opportunity or a time to exit stocks completely. This is harder than most people think, although there is plenty of help from smart folks that is only a Google search away.
Is Online Investing Safe? The Bottom Line
Online investing is a safe way to put your cash to work over the long-term. It’s not going anywhere, and huge investments in security ensures some hacker can’t get in and magically move your money into some Swiss bank account.
The big risk is what happens when amateur investors are in charge of their own money. Some will embrace risky individual stocks when blue chip stocks might be the better choice. The optimal strategy for most investors is a slow investment into a broad market ETF, but it’s easy to be enticed by other options when you’ve got the whole investing world at your fingertips.
Still, this doesn’t mean you won’t be successful at it. A little research, the right temperament and consistent savings will go a long way to eventually making you wealthy.