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 Cryptocurrency?
One of the biggest trends impacting the finance world over the last few years has been the rise of cryptocurrency. Although it has died down somewhat, it seemed like everyone was clamoring to invest in Bitcoin, Ethereum and Ripple, among others.
Although these new alternative currencies do have some interesting applications, much of the interest surrounding them is nothing more than speculative greed. People saw the value skyrocketing and immediately became interested. Many didn’t understand the fundamentals, but that didn’t matter. Greed kicked in and investors clamored to get a piece of the action.
Cryptocurrency became a major fascination in December 2017. The price of one Bitcoin went parabolic, increasing from approximately $10,000 USD to $20,000 USD in just a few weeks, before promptly falling again. Other cryptocurrencies saw similar price movements.
Let’s take a closer look at this mysterious sector, including what cryptocurrency is, some of the ways you can use it and whether it is still a good investment today.
Cryptocurrency Explained
Bitcoin, which is the largest and most influential cryptocurrency, was created back in 2008 by a mysterious person named Satoshi Nakamoto. Nobody has been able to find Mr. Nakamoto, and it is generally accepted such a person didn’t exist.
The currency is decentralized, meaning there is no central bank controlling it. There are only a finite number of Bitcoins that will ever be in existence, which helps protect it from inflation, and Bitcoins are only created as a reward for lending the computing power to help process Bitcoin transactions in a process called mining.
All Bitcoin transactions are done through a secure area called the blockchain. When a transaction is processed through the blockchain, your coins are registered to you using a special key. If you lose your key, you can no longer access your coins. They’ll float around the blockchain forever, unable to be accessed. You then must use a Bitcoin wallet to manipulate your Bitcoins.
Another benefit of the blockchain is all transactions are anonymous. The blockchain verifies you are using the Bitcoins that belong to you, but it doesn’t identify either party of a transaction. This privacy has a certain appeal to many users.
Some of the other cryptocurrencies have certain differences, but for the most part they offer the same benefits. They’re mostly modeled off Bitcoin, which continues to be the largest and most influential.
How to Use Cryptocurrency
Once your Bitcoins are in your wallet, there are a few different ways you can spend them.
Some people simply sell their Bitcoins to another interested buyer and convert them into traditional currency. That money can then be easily spent.
But that is hardly an anonymous way to spend money. If that is more interesting to you, then you will want to exchange your Bitcoins for items using one of the websites that accept Bitcoins as a form of payment. There aren’t many of these sites out there, however, because Bitcoin transactions take a long time to process and it is an expensive endeavor (at least when compared to accepting credit cards).
There are also Bitcoin ATMs popping up — devices that allow a user to withdraw a portion of their Bitcoins as cash.
Investing in Crypto
If you are a Bitcoin (or other cryptocurrency believer), how exactly can you go about investing in these assets anyway?
Unfortunately, it is not quite as simple as investing in the stock market; it is a pretty risky endeavor, and I am not just talking about the potential to lose money on the investment.
For instance, in Canada, the founder of a cryptocurrency exchange company called Quadriga suddenly died while visiting India. Some $145 million worth of various types of cryptocurrencies owned by investors were locked because nobody had access to his laptop, where the information was being stored. The company is now bankrupt, investors still haven’t got their money back and some people allege the founder stole a bunch of investor money.
When you put your money in a bank, or into the stock market, there are protections in place to ensure your investment doesn’t disappear if the exchange goes out of business. There are no similar safeguards in place for the cryptocurrency world.
One other risk is the volatility of all these different cryptocurrencies. Although there is underlying value in a currency with a finite limit, most investment decisions in crypto are pure speculation. This means the value of each type of currency will bounce around as sentiment changes. It’s not uncommon to see the value of certain cryptocurrencies go up or down by 20% in a single week. Traditional currencies, meanwhile, will go decades without that kind of weekly price movement.
Now that we have gotten the risks out of the way, here’s how you can go about investing in cryptocurrency. It’s a straightforward process once you have opened an account.
The first step is opening an account with one of the various cryptocurrency trading firms. This is when one of the advantages of these assets turns into a disadvantage. Since the whole crypto space is lightly regulated, some of these companies have some lackluster business standards.
You will also need your own digital wallet, which is your own secure way to access your Bitcoins. Remember, it is imperative you remember how to access your own wallet, or your Bitcoins won’t be able to be accessed (and you will lose everything).
You’ll also be asked to supply various forms of identification to secure your digital wallet. This will include things like your social security number and your driver’s license. Remember, any gains you make trading cryptocurrency are taxable and the Internal Revenue Service (IRS) wants its share.
You can then fund your digital wallet with your bank account, which will also help you withdraw your profits when done.
The Bottom Line
All the various kinds of cryptocurrencies are fun, exciting and offer limitless upside potential. In a world where the Federal Reserve is expanding monetary supply at a rapid rate, I can see why these assets hold so much appeal.
But there are significant downfalls too. The cryptocurrency world is lightly regulated. Bitcoin isn’t very useful until it is converted to regular currency, which is a process that takes time and is relatively expensive. With great return potential comes great risk. The value of your crypto investments can easily drop by 20% in just a week or two.
Personally, I would wait until the sector is a little more mature before investing in it. There’s just too much risk there for me.