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.
Know What You're Signing up For
American students have assumed massive amounts of loan debt. Student loan borrowers owe about $1.53 trillion, with an average debt per person exceeding $37,000. The burden student loans place on the current generation of students is staggering.
We’ll give you the facts you need to understand your options to make student loan repayment easier, in particular looking at subsidized vs unsubsidized student loans. It will also be useful to take a look at a loan calculator when considering the different types of loans available as well as repayment options.
The Different Types of Student Debt
The federal government provides about 93% of all student loans; the remainder is funded by private lenders. The two main types of federal loans are subsidized and unsubsidized.
Subsidized Student Loans
The federal government offers direct subsidized student loans to undergraduates with financial need. These loans are characterized by the following:
- Your school will determine how much you can borrow based upon your financial need.
- The U.S. Department of Education will pay interest on your loan during these specific periods:
- You are attending school at least half-time.
- You are in the grace period after leaving school. The grace period is the six months after graduating, leaving school or dropping below half-time status. Once the grace period ends, you must begin repayments.
- You are in a period of deferment, in which your loan payments are postponed for various reasons.
- The aggregate limit on subsidized loans for an undergraduate is $23,000. The undergraduate can take a mix of subsidized and unsubsidized loans of up to $31,000 (for dependent students) or $57,500 (for independent students).
Unsubsidized Student Loans
An unsubsidized loan is one in which you must begin paying interest on the loan right away. Unsubsidized loans are available from the federal government and private lenders. The federal direct unsubsidized loan program features the following:
- Loans are available to undergraduate and graduate students who do not have to demonstrate financial need.
- Your school determines your loan size by evaluating the cost of attendance and any other financial aid you obtain.
You must pay interest on the loan during all periods after accepting the loan.
- However, if you can’t pay interest while in school at least half-time, in a grace period or in a deferment/forbearance period, the interest will accrue and be added to your loan principal amount.
- The aggregate limit on undergraduate unsubsidized loans is $31,000 (for dependent students) or $57,500 (for independent students).
- The aggregate limit on student loans for graduate or professional students is $138,500, of which no more than $65,000 can consist of subsidized undergraduate loans. However, graduate and professional students who are enrolled in certain health programs may receive a higher aggregate limit on unsubsidized loans.
Other Federal Loan Programs
In addition to the Federal Direct Subsidized and Direct Unsubsidized Loan Programs, the following federal student loans are available:
- Direct PLUS Loans for parents, graduates and professional-degree students. These loans have no grace period.
- Federal Perkins Loan for undergraduate, graduates and professional-degree students. These loans are administered by the college you attend. The grace period is nine months.
Private student loans from banks and other sources are not guaranteed by the government, and are more expensive than federal loans. For various reasons, about 7% of student loan money is lent by private companies, including Social Financial (SoFi), Citizens Bank, Wells Fargo and many others.
Naturally, the repayment terms vary from one lender to the next. Many private loans offer six- to 12-month grace periods, a feature not available on Federal PLUS Loans.
Private student loans may feature fixed or variable rates, or a mixture of the two.
The two types of private student loans are:
- Direct-to-consumer: The student interacts directly with the lender and must provide verification of enrollment. Proceeds are distributed to the borrower.
- School channel: The school certifies the student’s enrollment and receives the proceeds from the lender. These loans are usually cheaper than direct-to-consumer loans, but take longer to arrange.
Federal student loans may offer deferment and/or forbearance, features seldom found in private student loans. Therefore, this section addresses only federal student loans.
A deferment is a temporary delay in the repayment of loan principal and interest, usually because of an inability to repay due to unemployment or other circumstances. During deferment, the government may pay the interest on direct subsidized loans and Perkins loans, but not on unsubsidized and PLUS loans, where instead the interest accrues. Accrued interest may be added to the principal amount of your loan once the deferment period ends.
Check the Federal Student Aid site for more information about qualifying for a deferment.
Forbearance allows you to stop making payments or reduce your monthly payments for up to 12 months when you don’t qualify for a deferment. Interest accrues during periods of forbearance, although you can choose to make the interest payments during the period in order to avoid accrual.
There are two types of forbearance:
- Discretionary: The decision to grant forbearance rests with your lender. It is usually requested because of financial hardship or illness.
- Mandatory: You may qualify for forbearance if you meet any of the eligibility requirements listed on the Federal Student Aid website.
The federal government offers four income-based student loan repayment plans. These are available for Direct Subsidized and Unsubsidized loans, as well as Direct PLUS loans to graduate and professional students (but not parents).
Under these programs, your income and family size are used to determine how much you shell out each month in student loan repayments.
The four plans are:
- Pay as You Earn Repayment Plan (PAYE Plan)
- Revised Pay as You Earn Repayment Plan (REPAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
See the Federal Student Aid website for all the details regarding income-based repayment programs.
Subsidized and unsubsidized federal loans are quite similar. The basic differences are:
- Amounts available: Unsubsidized loans have higher loan limits.
- Financial need: You do not have to show financial need to get an unsubsidized loan.
- Undergraduates only: Federal subsidized loans are available only to undergraduate students.
- Interest payments: The federal government will pay your interest on a subsidized loan during specific periods. You must pay interest on an unsubsidized loan right away, but if you can’t, the interest accrues and is added to your loan principal.
Private student loans are also available, and all but a few offer any subsidies. These typically have higher interest rates and are based upon your (and your cosigner’s) credit score.