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.
The Time is Now
When should you start saving for retirement? The simple answer is, if you aren’t already saving for retirement, you should start saving now.
Retirement may seem like a long way away, but it will be here sooner than you think. When you start saving for retirement early on, you benefit from the power of compound interest. You get your money working for you instead of the other way around.
In this article we will also look at different saving strategies depending on when you begin, why it is important to start saving early and what to do if you cannot start saving until later on in life.
When to Start Saving
You should start saving for retirement as soon as you are able to. If possible, it is best to start saving for retirement in your 20s, after you graduate from college and start earning a paycheck at your first full-time job. That’s because the sooner you start saving, the longer your money has to grow and benefit from the power of compound interest.
You may have heard of compound interest before. It’s when you earn interest on interest. By continually contributing toward your retirement over time, you can take full advantage of compound interest and watch as your retirement savings grow.
If you are no longer in your 20s and you did not start saving for retirement, there is no need to panic. There tends to be a lot of competing financial priorities in those early years. Besides saving for retirement, you may have student debt and be saving for a home or a wedding. There’s only so much money to go around. By taking a balanced approach, you can save some money toward retirement as well as your other financial goals.
Although it is better to start saving as early as possible, it is never too late to start saving for retirement. By getting into the habit of regularly contributing to your retirement savings, a little can go a long way. By contributing a small portion of your paycheck toward retirement, it will, over time, grow to a sizable nest egg for you to draw on in your golden years.
Saving Strategies Based on Your Age Bracket
If you begin saving in your 20s, you have the benefit of time on your side. If you are 20 years old and you plan to retire at age 65, you have 45 years of saving. That’s a lot of time! By regularly contributing a portion of your paycheck into a retirement account, over time it will grow to be enough to provide a comfortable retirement for you.
If you begin saving in your 30s, you do not have as long as someone in their 20s, but you still have plenty of time to save. You’ll probably want to save more aggressively than someone who started saving in their 20s, especially if you want to retire early. Figure out when you would like to retire and work your way backward.
You’ll need to figure out how much money you would need to set aside from each paycheck and the rate of return you would need to achieve. Then, you can automate your savings. That way your retirement savings are out of sight and out of mind, and you are not tempted to spend them.
Saving for retirement in your 40s still isn’t too late. Some people take the approach of focusing all their cash flow on paying off the mortgage. Once their mortgage is paid off, they redirect that cash flow toward saving for retirement. If you are doing that, the strategy can totally work.
Just make sure you are disciplined and pay yourself first. If you simply splurge and enjoy the extra cash flow instead of saving it, you will find yourself a lot further behind than those who started saving for retirement in their 20s and 30s.
The Importance of Early Saving
Although you may be healthy as a horse right now and think you will live forever, the sad reality is that we won’t be able to work forever. If you are in a blue-collar job that requires you to use your body daily, your body will eventually wear out and you will have no choice but to retire.
Likewise, if you are someone working a white-collar job, your job may not be as physically taxing as someone working a blue-collar job, but you will still want to retire one day. You won’t be able to sit at a computer and work forever.
Another reason why it is important to start saving early is because we are usually on our own when it comes to saving for retirement. If you are hoping to rely on government benefits in retirement, you are going to be in for a rude awakening. Government benefits simply won’t be enough for most people.
Likewise, company pension plans are few and far between. If you have a company pension plan, count your lucky stars. For everyone else, it is a good idea to start saving as early as possible for retirement.
Through the marvels of modern medicine, we are living longer than ever before. That means that you’ll need to support yourself longer in retirement. If you do not save enough money for retirement, you run the risk of outliving your retirement savings. This is not a fun situation to be in.
You could be forced to work in your golden years because you did not save enough for retirement. This is not a fun way to live to say the least. Situations like this can be avoided by getting in the habit of saving for retirement early on.
It’s Never Too Late to Save
As mentioned earlier, sometimes it just isn’t possible to save for retirement early on. Maybe you are struggling with student debt, or you are having trouble finding a decent job after college. With the lack of financial literacy at schools, sometimes you do not learn the importance of saving for retirement until later on in life. If that is you, what do you do?
The good news is that it is never too late to start saving for retirement. That being said, the earlier you start saving the better. As mentioned earlier, figure out the amount you would need to live comfortably on in retirement. Then, work your way backward.
Figure out theexact amount you would need to save from each paycheck to meet your retirement goal. Although it is probably higher than if you had started earlier, by starting now you can at least get caught up and start saving toward a comfortable life in retirement.