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.
Use a Professional's Experience to Your Advantage
Thanks to the many advances in technology, today, you can handle just about any financial transaction online. This includes buying and selling stocks, which can save you money and time.
Don’t plop down at your computer and start trading and investing all on your own, though. Instead, seek out an online stock broker who can assist you in making your investments and trades all from the comfort of your home, or whatever your preferred location.
If you are a novice investor, or if you are new to investing, you have no business trying to carry out stock transactions online and on your own. It has nothing to do with your intellect, but it has everything to do with your lack of investment savvy. Also, you likely do not have access to the tools and resources that licensed stock brokers do, which puts you at a disadvantage.
This is where an online broker can help you tremendously.
Here, we’ll go over the nuances of using an online stock broker.
The Coming of Age for Online Stock Brokers
In mid-July of 2019, all major U.S. indices were enjoying record highs. Watching the Dow, S&P 500 and the Nasdaq soar to their all-time highs piqued the interests of many who weren’t investors.
Those who are unfamiliar with the stock market are the most likely to avoid it, and therefore its gains. However, there is no need to continue to sit on the sidelines.
This is where online stock brokers come into play. They don’t just help investors buy and sell stocks online. They also bring a wealth of experience to their clients thanks to the resources available to them through their firms.
During the mid-1990s, before there was the type of high-speed internet that we have now, stock brokers facilitated transactions far differently. They did a lot of cold calling to potential investors, and pitched their stock investment ideas.
This process was arduous, so brokers often spent the bulk of their time on “sure” bets. This meant they focused on investors who they had the greatest chance of persuading to buy. The relationships they’d established with previous clients afforded them their trust.
Now investors can go online and access the information they need to initiate a stock trade. With that, the tables have turned on brokers, making it worth their while to tap this new, but growing, group of investors.
Novices and Online Stock Brokers
Novices often let their feelings of inferiority prevent them from investing. The thought of going into a swanky office of a stock brokerage firm may be intimidating. Online stock broker options can ease such anxieties — you don’t have to meet face-to-face with anyone.
That’s just one of the positives that goes along with buying stocks online with the help of a broker. Having an experienced broker can help you avoid making knee-jerk investment decisions that can be detrimental.
Anyone can go online and open an account to trade stocks. However, working with an online stock broker can give you a bit more confidence. Instead of being on your own, your broker can make suggestions based on their knowledge of different stocks, sectors and industries.
Understand that online stock brokers simply handle your transaction. While they may answer your questions, you are responsible for your own investments. If you select a stock that falls in price, the broker is not responsible at all.
Investing Independently, but Not Anxiously
Although you are personally responsible for your investment picks and their performances, this can be a good thing. That’s because you control your investment strategy. You’re not beholden to do whatever the broker pitches.
Brokers also take some of the leg work out of investing. They usually present a standard list of investment options, which include stocks, bonds, mutual funds and ETFs (exchange-traded funds).
Online Brokers and Costs
A significant benefit of online brokerage houses relates to costs. Online brokers typically offer lower costs, such as fees, than traditional brokers.
They can undercut their colleagues because they don’t offer extensive personal services.
In order to find those with the lowest costs, you’re going to have to do considerable research to compare them. During your search, pay close attention to the following:
- Commissions: Brokers commonly assess fees for each stock trade. Expect to pay at least $5.
- Minimum account balances: You’ll have to open an account to start investing or trading, and the minimum amount is typically $500.
- Account fees: Like most banks, brokerage firms can charge fees. These include annual fees, and fees for research.
Downsides of Online Stock Brokers
There is a downside to online brokers offering lower costs. Their costs are lower because they don’t have the overhead costs their brick-and-mortar counterparts do. They are also able to keep their costs low by not offering extensive customer service.
Clearly, for novices, this can be a problem. If you are comfortable with researching what you need on your own, this may not be as much of a problem. If you are clueless about investing, you may consider consulting a financial advisor.
Market volatility could lead to some online brokers taking unnecessary risks. They may hastily make trade decisions that could negatively impact your returns. You can avoid this by having order limits put in place.
According to the U.S. Securities and Exchange Commission:
A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.
A limit order is not guaranteed to execute. A limit order can only be filled if the stock’s market price reaches the limit price. While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a pre-determined price for a stock.
Make sure you clearly understand and are comfortable with the pros and cons we’ve listed here before choosing an online broker.
Understand that you may have to pay more if you want one-on-one attention from your broker.
Using an online broker can save you time. This takes on more weight if your professional and personal life leaves takes up most of your time. You may not have time to stay abreast of the stock market or events that could affect your portfolio.