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 to Do After a Stock Market Crash
It’s never a great feeling to watch your hard-earned money evaporate right before your very eyes during a stock market crash.
That’s exactly what investors have experienced over the last few weeks as COVID-19 wrecked the economy and, with it, the stock market itself. Both the Dow Jones Industrial Average and S&P 500 plunged as more pieces of virus-related bad news hit the market. The only saving grace for investors has been that stocks have recovered somewhat, although we’re far from being out of the woods just yet. The market could easily plunge again if social distancing and other virus-suppression efforts don’t work as well as expected.
Investors also need to remember that this won’t be their last stock market crash. The economy has a funny way of imploding every decade or so, meaning investors must come up with strategies that will withstand every market crash, not just the current one.
To give some advice on what to do after a stock market crash, let’s take a closer look at some strategies regular investors can use to effectively navigate through this market crash, as well as the inevitable future ones.
First Off, Don’t Panic
The time to panic and sell everything is when nobody else is. Because by the time everyone else panics, you’ve already lost a big chunk of your money. By then it’s way too late.
The first step towards not panicking is to understand the nature of markets. The stock market is going to crash every decade or so; it’s a reality of investing. Sometimes the bull market will last a little longer than a decade, but the result is inevitably the same.
Going through today’s market panic is a wonderful experience for the next one. I realize that may be of little comfort now, after you’ve lost a bundle, but it really does help. The Great Recession of 2008-09 was my first stock market crash, and I always regretted not buying more cheap stocks. I was paralyzed with fear, worried the economy would never come back. I didn’t make the same mistake this time.
The Beauty of a Diversified Portfolio
Many investors are all about stocks, putting 100% of their portfolio into equities. The logic is simple. Stocks offer better long-term return potential than bonds. Stocks are more volatile, but many rookie investors shrug off this downfall by telling themselves the volatility won’t be so bad.
And then the inevitable happens, and these investors start to panic. It’s happened a million times, and it’ll happen a million more. It’s a pretty common mistake.
To keep things simple, say you have a portfolio of 50% stocks and 50% bonds. The stocks fall by 25% and the bonds hold their value. That translates into a 12.5% loss, which is much easier to stomach.
But bonds also have another big advantage. They serve as a convenient cash source when you get the opportunity to buy undervalued stocks. It’s easy to sell a portion of your bonds, use the proceeds to load up on cheap stocks, and then replace the lost bond capital with your savings after stocks rally again.
Bonds can also serve as a backup emergency fund, capital that can be withdrawn if you’re facing an extended job loss or other similarly dire situation. Having access to extra cash during a recession is a nice safety cushion, even if your emergency fund is fully stocked.
When Should You Sell?
Ideally, the answer is never. Especially during a market crash. The last thing you want to do is crystallize a loss when markets have reached their bottom. Investors usually start to worry right around when stocks are bottoming, since that’s when economic and stock market news tends to be the worst.
The above is especially true if you own a diversified collection of ETFs. Such a portfolio doesn’t have much risk from the individual companies that make up the ETF itself, so you needn’t worry about individual companies going bankrupt.
It’s a slightly different story when you own individual stocks. Most companies will recover from a downturn, especially if you focus your portfolio on strong organizations that have a history of navigating successfully through tough times. But there’s always a sector or two that gets hit particularly hard — like airlines or hotels this time around — and a decision must be made about any investments in that area. Selling an investment that’s down 50 to 75% can be painful, but sometimes it’s the correct decision.
An Easy Buying Strategy
One thing that paralyzes investors during any market crash is an ill-advised quest to put all their cash to work at an opportune time. They’re trying to time the bottom of the market to maximize their profits.
I know I fell victim to this back in 2009. I kept holding out, looking for a slightly better entry point. Then, markets turned on a dime and I missed my opportunity.
Investors need to realize they can’t time the market. The greatest minds in the investment universe can’t accurately predict where stocks will go tomorrow, next week or next month. If they can’t do it, what chance do regular folks have?
We have a much greater chance of success if we predict where stocks will be five or ten years from now. Sure, there are historical exceptions, but if you guessed stocks would go higher over the long-term, you’d very likely be correct. We must remember that stocks usually go up over time. They’re even more likely to go up over time if you’re buying during a market crash.
For my own portfolio, I’ve been following a simple rule. I’ve slowly been putting money to work over the last couple of months, steadily buying as markets fell. I’ve also been buying as markets recover. I’m confident this dollar cost averaging strategy will work well over the long-term.
The Recovery Process
Just like we can’t predict the bottom, we also can’t predict how markets will recover.
We can make some guesses based on previous market recoveries. History has shown the market tends to recover right as economic news hits a bottom. That’s right, the market recovers right when things look the bleakest.
There’s just one big problem: how do you know when things look the bleakest in real time? You might think things can’t get any worse, and then they do. We can only measure this years later, and by then it’s too late to buy.
Remember, the stock market looks forward. It doesn’t necessarily reflect the news of the day. Rather, it reflects investor expectations of the world three to six months from now.
The Bottom Line
Stock market crashes are tough on any investor. There are few worse feelings than logging into your brokerage account and seeing a big chunk of your money evaporated away.
But remember a few important lessons and you’ll end up just fine. Stocks will inevitably recover. You only lock in a loss if you sell. The time to buy stocks is when the market is on sale, even if you miss the bottom. And, most importantly, don’t panic. Just stay the course and you’ll end up just fine.