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.
ETFs Could Be Your First Entry Into Investing; We Tell You What You Need To Know
Those wishing to invest in a basket of securities instead of individual stocks or bonds often think mutual funds are best.
However, this isn’t always the case — there is a less discussed alternative that could be more beneficial for several reasons. We’re talking about exchange-traded funds, or ETFs.
ETFs are often compared to mutual funds, but have gained more attention because of their benefits.
In this post, we’ll explain those benefits, as well as the disadvantages of ETF investing. We’ll provide information about how to become an ETF investor. Given the similarities between ETFs and mutual funds, we’ll point out how they compare.
What are ETFs?
Exchange-traded funds are baskets of securities. The securities can include stocks, bonds and commodities. Because ETFs trade like stocks, you can make trades for them all day.
There are two types of ETF investments: passive and active.
Passive investing entails being able to buy or trade at your leisure. This is attractive to long-term investors who don’t buy and sell stocks throughout the day based on market movements or volatility because they are looking for short-term gains.
The less frequent trading could keep investors’ trading costs low, but it could cause them to miss out if a stock moves higher in a short amount of time.
Active investing is the opposite. It entails the investor being willing to sell and buy stocks throughout the day. By actively keeping an eye out for what could cause their stocks to move higher or lower, the investor has more control. This means active investing can lead to higher returns than passive investing.
However, active investing can cause investors to try to time the market, which is very risky. Novice investors should steer clear of active investing until they completely understand their risk appetites.
Benefits of ETFs
One of the main benefits relates to costs. For example, broker commissions for ETFs can be lower than those incurred when you buy stocks individually. Just like stocks, ETFs trade on an exchange, including the Dow, S&P 500 and the Nasdaq.
For those who have a limited amount of money to invest, certain ETFs can be ideal. There are brokers who offer discounts, which can help these investors cut their trading fee costs. Instead of investing large amounts of money at one time, investors can invest small amounts at their leisure.
If you have tax concerns related to investing, ETFs are worth considering. That’s due to their tax advantages. One particular tax investors must contend with is the capital gains tax. Because of the way many ETFs are managed and redeemed, investors can reap fewer capital gains.
ETF investors also benefit from receiving dividend payouts, just like stockholders. They are typically paid out each quarter. The amounts are based on the percentage of shares you own in the ETF.
ETF investors know within moments how much they paid to buy shares and how much they received after selling. Fidelity points out a particular benefit of ETFs related to how they are traded.
The nearly instantaneous trading of ETF shares makes intraday management of a portfolio a snap. It is easy to move money between specific asset classes, such as stocks, bonds, or commodities. Investors can efficiently get their allocation into the investments they want in an hour and then change their allocation in the next hour. That is not generally recommended, but it can be done.
Disadvantages of ETFs
While ETF investing can have lower costs, overall, commissions can quickly add up. Investors usually have to pay a commission every time they buy or sell an ETF. As noted by Charles Schwab, a stockbroker, over time, those commissions can really add up and become cost prohibitive.
The firm also points out ETF disadvantages, as they relate to spreads. It states:
- On top of commissions, investors also pay the "spread" when buying or selling ETFs.
- The spread is the difference between the higher price you pay to acquire a security and the lower price at which you can sell it.
- Don’t forget: the wider the spread, the higher the cost.
Spread refers to the highest price a buyer (bid) is willing to pay for a share and the lowest price (ask) the seller is willing to accept. The amount of the spread varies from one ETF to another, and tends to be greater for ETFs with low trading volume, Charles Schwab points out.
Also, it may be difficult or impossible to make automatic investments or withdrawals.
Readying to Invest in an ETF
You won’t have a problem finding an ETF that’s suitable for you. Because there are at least 2,000 of them, your problem will be narrowing down your choices.
The best thing to do is to draw up a list that includes your priorities and search accordingly.
Here are some other things to consider:
- Make sure the ETF has a significant amount of interest. Look for those that have assets of at least $10 million.
- ETFs that are based on widely followed indices and a diverse range of sectors often perform better that are those based on niches, or less popular sectors.
- Review the ETF’s trading activity and trading volume. You don’t want to sink your money into a fund that lags in either because that could be a sign that it has liquidity problems.
Understand that liquidity is important if you want to sell any of the shares in the ETF you choose before it stops trading. Otherwise, you may have to wait until the liquidation process is completed, according to Investopedia.
ETFs versus Mutual Funds
When you hear about ETFs, mutual funds usually come up. That’s because there are so many similarities. However, there are some key differences you should understand before you choose one over the other.
Here’s a comparison chart that breaks down the similarities and differences:
Mutual funds have far more assets than ETFs largely because they are so popular among companies that offer retirement plans for their workers. U.S. equity mutual funds have around $6.7 trillion, compared with $1.7 trillion for ETFs, according to Morningstar. ETFs have been making considerable gains as more financial advisors recommend them.
Choosing between a mutual fund and an ETF boils down to being a sheer matter of choice. If the pros and cons of each are too overwhelming to make a decision, seek professional advice from a financial advisor.