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.
What Is a Balance Transfer Credit Card?
Credit card debt is one of the worst types of debts you can have. It’s hard to get ahead when you’re paying some unsecured creditor 1 to 2% each month on your unpaid balance.
Getting yourself out of a mountain of credit card debt is no easy feat. Something always seems to come up, temptations that threaten to keep you in debt forever. But the journey is worth it. There’s no better feeling than finally paying off those pesky cards. The additional cash flow freed up by finally ending those payments sure helps too.
One under-utilized trick many Americans use to pay off their credit card debt is to use a balance transfer to their advantage. Many folks ignore this powerful strategy because they’re worried about having another credit card. But when used right, a balance transfer credit card can take months off your debt repayment journey.
Let’s take a closer look at balance transfer credit cards, including how they work, the pros and cons of using one, how to get the best interest rates, and how they will impact your credit.
A balance transfer credit card is a special kind of card that appeals directly to folks who already have a credit card balance.
These cards come with special advantages that are designed to entice people who are looking to pay off their credit card debt. Usually a balance transfer credit card will come with a low introductory interest rate — often as low as 0% — but for a short period of time. After six months or a year, the interest rate shoots back up to a regular rate. In fact, many balance transfer credit cards offer a worse rate than normal credit cards, since the issuer has to make back some of the interest they lost during the intro period.
The strategy to use such a card is simple. You transfer your debt from a regular credit card to a balance transfer one, locking in a period with an ultra-low interest rate. You then throw every nickel you can at that debt over the introductory period. It’s the perfect time to be aggressive, since every payment is going directly towards principal. Even if you don’t get the loan paid off in full, such a strategy should still be enough to save you some substantial interest costs. Especially if you’re sitting on a lot of debt.
The Pros and Cons of Using a Balance Transfer Credit Card
Let’s start with the advantages of using a balance transfer credit card, since they’re quite simple. The big reason why you’ll want to get one is because the strategy can allow you to pay off your debt much faster.
Depending on how much you owe, this simple debt busting strategy could easily save you hundreds (or even thousands) of dollars.
Many balance transfer credit cards also offer competitive interest rates once the special introductory period is over and offer various rewards for purchases. In other words, the card used to save a little money on interest could easily become your next credit card.
The biggest reason many folks don’t bother using balance transfer credit cards is the information factor. Every card has different rules. Some offer only a short introductory period. Others are much longer. Some offer a competitive interest rate when the introductory period comes to an end. Others don’t. And so on. Every card is unique, and there are dozens of different ones on the market today. Put it all together and it translates into an intimidating experience.
There’s also the time factor. It takes time to research a new credit card, apply for it and then take care of other minor details. It’s worth it if your credit card balance is approaching five figures, but many choose not to bother. Especially when the total interest savings might only be a couple hundred dollars.
Finally, you’ll want to make sure the card has a competitive rate once the introductory period expires. Just in case you don’t make quite as much progress as you hope. In fact, you may be better off sticking to your current card.
How to Find 0% Interest Offers on Balance Transfer Credit Cards
It doesn’t have to be complicated. Spend a little time with a credit card comparison tool and see what the various companies are offering. There will be 0% interest offers out there but be warned; not every company will offer such generous terms to try and get you as a customer.
Some balance transfer credit cards throw a bit of a curve ball designed to trick people. Many offer a 0% interest rate but will also charge you 3 to 5% of the total balance as a transfer fee. That’s a much better deal than paying 18 to 24% per year, but it’s still not ideal.
What About Your Credit Score?
Opening and closing credit cards are both actions that will impact your credit score. And not in a good way, either.
When you apply for a new credit card, the issuer will do a credit check. A “soft” credit check won’t impact your credit, but a “hard” check will. A credit card application will likely result in a hard credit check, which will push your score lower. Therefore, it’s important to pick a balance transfer credit card before you even apply. You just want one hard credit check on your credit report.
You’ll also experience a hit to your credit once you’ve paid off your debt and closed this new credit card down. This isn’t something to worry about; it’ll just be a temporary hit since the credit card was only held for a short amount of time. I’d think twice before closing any long-term credit cards, however.
The Bottom Line
They don’t get a lot of attention, but they should. When used properly, balance transfer credit cards can save you a bunch of cash and help you conquer that debt months sooner than simply paying off your existing card.
Just make sure to be careful before signing up for a balance transfer credit card. No two cards are created equal. Do a little research, crunch the numbers and make an informed decision. Take care to ensure you use this financial tool properly, or you may unnecessarily keep yourself in debt longer than anticipated. And if you haven't yet figured out how long it may take you to pay off your credit card debt, you can use our credit card debt calculator.