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.
It's All About Your Credit
Having a low-interest credit card is part of a life well-lived. For those who have them, it means the ability to finance purchases cheaply. For those who want them, it’s the reward for building (or rebuilding) excellent credit.
Read on to learn about low-interest credit cards and how to get one.
What Is a Low-Interest Credit Card?
Credit card interest rates are expressed as an annual percentage rate (APR). This is a compound interest rate that may also include fees that are not separately charged. You pay interest on credit card balances that you don’t fully repay within the grace period, which extends a few weeks beyond the end of the monthly billing cycle — for purchases.
Cash advances, which may have a different APR, have no grace periods. The point of APR is that it enables you to directly compare credit cards to one another.
Types of Low-Interest Credit Cards
In a nutshell, low-interest credit cards include:
- Cards for those with excellent credit. This is usually defined as a FICO credit score above 800 on the 300-850 range.
- Cards that are designed for students. Many students have no credit history and therefore have low credit scores. Student credit cards give their owners a break, perhaps in the hope that the student will continue to hold the card after graduation.
- Business credit cards. However, the business (and/or its owners) should have good-to-excellent credit to qualify for a low rate.
- Secured credit cards. The card owner posts collateral in the form of a cash deposit in a bank account. The card issuer can access the cash if a payment is late or less than the required minimum. The interest rate is lower than that of an unsecured card because the collateral reduces the issuer’s risk of loss.
- Cards with introductory offers. This is any card that, at least temporarily, offers an introductory APR of 0%.
Average APRs for Different Credit Types
Typically, credit card APRs range from the low double digits to about 30%. A source puts 2019’s average APR on all new accounts at just above 19%, but those with excellent credit can currently get an APR of around 14% on average.
APRs for the remaining score categories (good, fair and poor) all average more than 20%. However, credit cards for students and businesses average between 17.5% and 18.5%. Secured cards charge just below 19%, on average.
APRs reflect current economic conditions, including the Fed Funds Rate and the margins that card issuers charge. During the Great Recession, APRs were about two to three percentage points lower, and have been rising ever since.
If today’s APRs seem a little steep, perhaps you’d be interested in a 0% APR. That’s not far-fetched at all. Rather, it’s a commonplace introductory rate that many credit cards offer. If you have average or better credit, you can easily obtain a card with a 0% introductory offer that extends from six to 18 months. The rate applies to purchases and, usually, to balance transfers. However, cash advances aren’t invited to this party.
Once the introductory period expires, the card reverts to its regular APR. For many, that’s the cue to replace the card with another and thereby enter a new introductory period.
If you have a large balance on your card at the end of the introductory period, you might choose a new card that offers 0% interest on balance transfers as part of its introductory offer. However, you’ll likely have to pay a fee around 3% for each transfer.
Never Pay Interest
It’s simple to get a permanent 0% APR credit card. Just pay your balance each month within the grace period. The card issuer might hate you for it, but you’ll avoid paying even a penny on interest. If you pick a card with no annual fee, you pay nothing at all for using your card (except for cash advances, which always charge interest).
Of course, the key is discipline: don’t charge more than you can pay for within the next few weeks. This makes your card a convenient alternative to writing a check or using a debit card, but you forego the ability to finance your purchases for more than a few weeks.
Pros and Cons of Low-Interest Credit Cards
On the plus side:
- You save money on purchases and balance transfers by paying less interest on balances you carry forward more than a month. This leaves you more money to use elsewhere.
- They help you pay your debts faster (thought use this credit card calculator before making any decisions).
- Great way to finance big-ticket purchases.
- Source of less-expensive emergency cash when you need it.
- Cards for those with excellent credit often have great benefits and rewards (cash back, points or miles).
Are there any downside to low-interest credit cards? The following might be possible:
- You might feel encouraged to overspend and end up digging yourself into a debt hole.
- Some low-interest cards charge high annual fees.
- More expensive than some alternative forms of credit.
However, if you choose a card with a 0% annual fee and control your spending impulses, you are ahead of the game. Some folks object to the use of any credit cards, but that’s a different discussion.
Who Benefits from a Low-Interest Card?
As we’ve established, there is very little downside to owning a low-interest credit card, if you can qualify for one. Those who benefit the most are folks who regularly spread out their repayments over several months. The ability to finance a purchase comes in handy when you are planning an expensive vacation, a wedding, a big-ticket purchase, etc.
Keep in mind, even a low-interest card, with an average APR of 14%, represents expensive credit compared to some alternatives. You might pay considerably less interest on a home equity line of credit or a personal loan.
How to Get a Low-Interest Credit Card
- To qualify for a low-interest card, you should establish an excellent credit score. That means paying your bills on time, making more than the minimum payment and utilizing only a portion of the credit available to you. It also means avoiding bankruptcy, foreclosure, defaults and collections.
- If you are rebuilding your credit, consider a secured card, which will come with a slightly lower APR than its unsecured counterpart, albeit with a lower credit limit.
- If you don’t mind rotating through a new credit card every six to 18 months, you can get cards with an introductory 0% APR.
- Finally, if you avoid unpaid balances, any card becomes a de facto 0% APR card. Unless you have some overriding reason to get a card that requires an annual fee, choose a no-fee card.