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.
Understanding How Trust Funds Work
If you have children to worry about, then you should consider starting a trust fund. The cost of a college education has risen significantly over the course of the last few decades, and is well above the rate of inflation. In fact, according to Forbes, student loan debt is the second highest consumer debt category in the USA after mortgages. Unfortunately, there are a few ways around the sky-high cost of tertiary education, but a trust fund is the best place to start.
Even if you don’t have a child with college in their future, trust funds can be applied for many purposes. If a loved one wealthy in assets falls ill, or needs help with their retirement plans, a trust fund is an excellent option.
What is a Trust Fund?
A trust fund is an agreement that lays out how assets will be held and managed for the benefit of another individual. It is essentially a legal entity that holds onto and manages assets on behalf of another person or entity.
There are many reasons to have a trust fund. The most common reason to open one is for the foreseeable expenses that come with getting a college degree. For this reason, trust funds are often set aside by parents well in advance of college. These trust funds help college students pay for their tuition and books, and any other college-related expenses.
A trust fund requires a grantor, who sets up a trust (account) and fills it with their assets. At the other end of the trust fund, there is a beneficiary (the person who receives the assets from the trust fund as per the agreement). Lastly, a trust fund needs a trustee: an individual or institution that manages the assets before they are passed onto the beneficiary.
Benefits of a Trust Fund
The main benefit of a trust fund is that a grantor can set aside assets for another individual while controlling how these assets are gathered, managed, or distributed. Money in some trust funds is put to use in mutual funds or other forms of investment while the beneficiary awaits receipt of these assets.
Trust funds can be used for many different purposes. However, they fall into two generic categories: revocable or irrevocable trusts.
A revocable (living) trust allows the grantor to maintain more control of the trust fund during their lifetime. These trust funds are most often used by elder family members looking to pass down their wealth to younger relatives. This is because living trusts allow the assets in the trust to avoid probate, which would lead to the assets being distributed to the beneficiaries faster. Living trusts are private and distributed to beneficiaries with a higher degree of discretion. Lastly, while the grantor is still alive and conscious, they may change the details of the trust fund if they’d like.
An irrevocable trust is a different story when it comes to any changes. Irrevocable trust funds very often probate, but there are some considerable benefits to the grantor should they give away control of their assets to the trust fund.
Setting Up a Trust Fund
The first step to setting up a trust fund is planning, which you could complete on your own. Before you fill out a stack of paperwork, you need to determine the more significant variables on your own. You can start by asking yourself the following questions:
- What assets will be placed in the trust fund?
- Who are the beneficiaries?
- Who will take the role of trustee?
- How will the assets be managed? How will they be held/invested, and when will they be distributed?
- Who will manage the assets?
- Is the trust fund revocable or irrevocable?
- Under what conditions should the trust be ended?
After you have a basic idea of the job your trust fund will perform, you’ll need to find an estate lawyer. Estate law, which controls the regulations on trust funds, varies on the state level. While different states have different laws, trust funds are functionally somewhat standardized across the USA.
Your attorney will create a “declaration of trust,” and/or other documents that codify your answers to the above questions into law. This step can be as simple or complex as the requirements that you lay out for your attorney.
Once all of the paperwork is finished, your attorney will need you to sign the paperwork to make it all official. From here, you only have a few steps left.
You’ll need to register your trust fund with the Internal Revenue Service, at which point they’ll give you a Taxpayer Identification Number for your trust. This number will allow your trust to declare its own tax returns and open its own bank accounts, among other things. This process can be completed online on the Internal Revenue Service’s website. The necessary documents can also be printed, filled out, and mailed to them.
Lastly, you’ll need to transfer the assets you plan on giving away into the trust fund. You can put many kinds of assets in the trust fund, including stocks, real estate, or cold, hard cash. There are different ways of storing different kinds of assets in a trust fund. You'll need to find out about the right way of having them transferred before placing them in the trust.
How Does a Trust Fund Work?
Once you’ve set up your trust fund, you may have some occasional work to do. You should keep detailed records of the trust fund and all its activities in case there is a lawsuit or discrepancy at any point in time. It is advisable to allow the trust to be managed by just one trustee with an all-in-one package for their trust fund management services.
As long as you complete the necessary steps to create the trust fund and keep records of its activities, the trust fund should fulfill its purpose as intended. The key points of a successful trust fund are good planning, good record-keeping, and good management.