It’s no secret that kids can be expensive, so here are some simple ways to save a little extra.
It’s no secret that raising kids is one of life’s most expensive undertakings. According to CNNMoney, it can cost nearly a quarter of a million dollars on average to raise a child born in 2013 to the age of 18—not including college tuition. The good news is there are ways to ease the strain on your bank account by reducing both daily expenses, such as food, and also larger ones, like housing.
These tips can help you save money while raising your family.
1. Cook at home
For the first time last year, Americans spent more money dining out than buying groceries. Takeout and restaurants are convenient for tired families, but the costs of prepared food can pile up quickly. Eating more home-cooked meals is one surefire way to limit food costs. Cook in bulk so you can lean on leftovers on busy nights.
2. Shop secondhand
Kids outgrow clothing and toys quickly, but you can stop the cycle of constantly buying new items. Arrange a clothing and toy swap with other parents, accept hand-me-downs from friends with older kids, buy clothing from consignment shops, and keep an eye out for local, online yard sales on social media. You may be surprised at how easy it is to find a pre-owned version of what you need—at a fraction of the price.
3. Set limits on extracurricular activities
Extracurricular activities like sports leagues and art and music lessons can do wonders to enhance a child’s skill set and social circle. However, out-of-school activities tend to be costly. While it’s typical for parents to cover these expenses, it’s not unreasonable to set limits. For example, offer to enroll your child in piano or guitar lessons, but not both.
4. Keep housing costs within your means
Housing is likely the biggest expense in your family’s budget. The trick is making sure your housing costs are not consuming an outsized portion of your income. Many financial experts recommend spending no more than 30% of your after-tax income on housing. As your family grows, it may seem like you need more square footage, but that may not be the most practical resolution. Rearranging furniture and clearing out clutter can do wonders to unlock new space in your existing setup.
5. Look for alternatives to your existing childcare
If housing isn’t your biggest budget item, childcare likely is. The Economic Policy Institute reports that most families live in areas where childcare is unaffordable, or the cost exceeds 10% of the average family’s budget. To find the best option for your family, compare the cost of a few choices—daycare, nanny or nanny share, or even having one parent stay at home full time—to see what makes the most sense. Find out if your employer offers a Dependent Care FSA PDF Opens in new window., which allows you to contribute pre-tax dollars toward daycare costs, and ask your accountant whether you qualify for the Child and Dependent Care Credit.
There are a number of ways to cut the cost of raising a family, but even so, you will likely find that those costs only rise as your kids get older. One way to get ahead of future expenses may be to make regular deposits into a savings account. When a large expense rolls around, you’ll thank yourself for having extra money on hand.
Welcome to your home tax deduction checklist! For homeowners, this kind of guidance is essential in the wake of all the changes ushered in by the new tax plan, the Tax Cuts and Jobs Act, that are still rolling in.
The biggest change for 2020? The standard deduction jumped a couple of hundred dollars for taxpayers—to $12,400 for individuals, $18,650 for heads of household, and $24,800 for married couples filing jointly. And this higher number means you need to dig in to all of your home expenses to see if their total sum tops the standard deduction, depending on your filing status. (If the total doesn’t surpass it, then you’ll just take the standard deduction on your taxes when you file.)
To help, here’s a list of all the tax breaks for homeowners.
In the past, you could deduct the interest from up to $1 million in mortgage debt (or $500,000 if you filed singly).
“But for loans taken out from Dec. 15, 2017, onward, only the interest on the first $750,000 of mortgage debt is deductible,” says William L. Hughes, a certified public accountant in Stuart, FL.
Mortgages are structured so that you start off paying more interest than principal. For example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate, you’d be deducting $10,920. (To find out how much you paid—or will pay—in mortgage interest any year, punch your numbers into our online mortgage calculator.)
Note that taking this deduction under the new tax law does require itemizing deductions, but it may be worth the hassle, especially for new homeowners.
If you bought a home and paid points, then you can still deduct those from your taxes. They must be “true,” or discount, points, not origination points. After all, points are essentially mortgage interest that you prepay, so it makes sense that they’d be treated like the rest of your mortgage interest. Each point is 1% of the loan amount, so if you paid 2 points on that $300,000 loan, you can deduct $6,000.
Watch: 5 Pet-Related Tax Deductions We Bet You Didn’t Know Of
Private mortgage insurance
For now at least, Congress has renewed this deduction.
If you can’t make a 20% down payment on your home, most lenders require that you pay private mortgage insurance, or PMI. The upside: It’s tax-deductible as long as your adjusted gross income is less than $100,000. (For each $1,000 you make after that, you can deduct 10% less of your PMI, up to $109,000.) PMI is generally between 0.3% and 1.5% of the loan amount annually, so on a $300,000 loan, you’d be deducting between and $900 and $4,500.
Home equity debt interest
Homeowners often take out a home equity loan or home equity line of credit in order to tap into some quick cash—for college, weddings, home improvements, or otherwise—using their home as collateral. And up until 2017, homeowners could deduct the interest on home equity debts up to $100,000 for married joint filers.
Now? “Home equity debt interest deductions have been eliminated,” says Eric Bronnenkant, a certified public accountant and financial planner, and head of tax at Betterment. That is, unless you spend the money on one thing only: home improvements.
So if you’re eager to renovate that kitchen, this deduction still stands. But if you have to foot the bill for your daughter’s wedding, the IRS will no longer pitch in, explains Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.
And unlike mortgage interest deductions, the new rules on home equity debt apply to all loans regardless of when they were taken. And to reap the benefit, your total debt—meaning your mortgage plus your home equity loan—can’t be more than the new $750,000 cap.
In the good ol’ days of 2017, your property taxes were fully tax-deductible.
This tax season, there’s a $10,000 cap on the combined amount of your property taxes, state and local income taxes, and (for states without income tax) deductible sales tax.
One bright side for landlords and those with vacation homes: “You can take deductions for all the properties you own, plus add your state income tax,” says Steven Weil, president of RMS Accounting, in Fort Lauderdale, FL.
Did you add solar panels or a solar-powered water heater last year? That means you can help yourself to a tax credit.
According to Bishop L. Toups, a taxation attorney in Venice, FL, qualifying solar electric panels and solar water heaters are good for a credit of 26% of the cost of the equipment and installation. For a $30,000 green investment, that’s a cool $7,800 back!
To qualify, the solar panels have to generate at least half of the energy used by the home, they have to be installed in your primary residence, and they can’t be used to heat a pool or hot tub. (Sorry!)
The credit will drop to 22% until the end of 2021 and then go away.
Home office deduction
The home office tax deduction disappeared for all W-2 employees who have an office elsewhere that they could use if they wanted to. The only people who can continue taking this deduction are those who truly run their own business from home, says Joshua Hanover, a senior manager at Marks Paneth.
Using the simplified home office deduction, self-employed people can take $5 for every square foot of office space, up to a maximum of 300 square feet. For a 200-square-foot home office, you’re looking at a nice $1,000 deduction. Just don’t try any funny stuff—it has to be a dedicated home office, used only for work. Here’s more on the home office tax deduction.
For more smart financial news and advice, head over to MarketWatch.
When you are retired or near retirement, it is generally a good idea to have a percentage of your savings in investment vehicles that are lower in risk. However, it can be difficult to find low-risk, high-return investments — especially now with certificate of deposit (CD) and savings account rates at less than 1 percent.
Not too long ago, retirees could earn sufficient interest in low-risk savings vehicles that could keep money protected while allowing adequate growth. But today’s extremely low rates make that nearly impossible. And rates are not expected to rise any time soon. In fact, the Federal Reserve has promised to keep rates low through 2023 to support economic recovery.
At any rate, there is more to consider than just returns.
There Is More Than Just Low Risk and High Return to Consider
The rate of return or interest rate is what most people are concerned about when considering a low-risk, high-return investment. However, there are other factors that may make different investment options more or less attractive. Before we talk about specific investment options, let’s look at six things to consider in addition to the rate of return.
Liquidity and Your Time Horizon
How soon do you need access to the money? Do you need the money to be liquid — available at any time?
With any investment, it is critically important to factor in the fees. Fees can eat up your returns and are often hidden.
Some investment vehicles have a minimum amount you need to invest. Certain account types also may come with a maximum investment.
The Inflation Rate
If your return on your money is not greater than the rate of inflation, then you are not actually earning real returns. Inflation is a sneaky factor to consider with regard to your rate of return. You should always think in terms of your “real” rate of return, which is your return minus the inflation rate.
Is Investment Designed for Income or Growth, and Is That What You Need?
Sometimes you will want to make a low-risk, high-return investment that is designed to pay you an income. Other times, you simply want your money to appreciate for withdrawal at a later date.
Your Overall Asset Allocation and Specific Needs
Many people around retirement age are fearful of keeping too much money in the stock market. But, the stock market is one of the best ways to grow your money for the long term and should be included in your portfolio — though preferably in the form of funds.
There are various rules of thumb for determining your best asset allocation between high-risk, high-return and low-risk, low-return investments and everything in between.
However, the most personalized way to determine your optimal asset allocation is to create detailed spending projections to determine how much money you will need and when and for what kinds of expenses. You will want the money that you absolutely need to spend in the near term in low-risk vehicles (with the highest returns possible) and money that you will want in the future can be invested with higher risk, potentially capturing higher returns. The NewRetirement Planner is designed to help you figure this out.
14 Low-Risk and High-Return Investments
So, where should you keep money that you want to protect from risk while earning adequate returns? I have got some bad news: There is really no such thing. You can’t have your cake and eat it too.
However, keep reading for some options for lower-ish risk, higher-ish return investment options.
1. Keep Money in the Bank
According to the FDIC, the national average interest rate on savings accounts currently stands at 0.05% annual percentage yield (APY) (compare that to the average stock market return over the last 100 years of 10%). The 0.05% APY applies to both average and jumbo deposits (balances over $100,000).
That being said, there is a lot of competition in the marketplace for cash savings, and you can find higher rates. But, this is overall not a low-risk, high-return investment. Consider it more of a low-risk and low-return opportunity.
How low? Well, if you had $50,000 in an account earning a 0.05% APY, then you would only earn $125.13 over a five-year period.
2. In High-Yield Savings Accounts (HYSAs)
A high-yield savings account (HYSA) is a type of savings account that pays significantly higher interest — 20 to 25 times the national average. Many of the best rates on HYSAs can be found from online banks.
If you were to earn a “good” rate of return on an HYSA, then you might earn 0.50% APY. This is significantly more than the 0.05% APY you might earn from a traditional bank. So, your $50,000 would earn $1,265.49 in five years ($1,000 more than in a traditional bank).
3. In Money Market Accounts
A money market account is a savings account that can also function as a checking account and typically comes with a debit card with unlimited transactions.
Money market accounts typically offer higher returns than what a bank offers on a typical checking account. A pro and a con is that the money is very available for withdrawal — good if you want the asset to be liquid, bad if you are trying to save the money. It may be too tempting not to touch it.
A typical APY on a money market account is 0.30% to 0.50%.
4. In Cash Management Accounts
A cash management account is another variation of other savings accounts and is typically offered by brokerage firms and robo-advisers.
Current APYs on cash management accounts are around 0.50%.
5. With a Credit Union
According to MyCreditUnion.gov, “Credit unions are not-for-profit organizations that exist to serve their members. Like banks, credit unions accept deposits, make loans and provide a wide array of other financial services. But as member-owned and cooperative institutions, credit unions provide a safe place to save and borrow at reasonable rates.”
Credit unions typically provide higher interest rates on cash accounts than banks. You will also typically pay lower fees for ATMs and other services.
However, always read the fine print. Many of the offers from bank/credit unions that have attractive rates either cap the balance that is available for the rate and/or require you to create a checking account and actually use their product for a certain number of transactions per month. And the caps can be really low ($3,000–$5,000).
6. In a Certificate of Deposit (CD)
A certificate of deposit (CD) is a financial product that restricts your access to your money for a specified period of time. For that restriction, you are rewarded with a better return than with traditional savings accounts.
Current rates are around 1.05% APY for a five-year term, and there is typically a minimum investment required.
7. Move Money Around Based on Incentives and Perks
You probably have a friend who changes credit card accounts frequently to take advantage of all the perks that are offered with various cards. This is often referred to as “churning.”
Well, if you’re willing to move your money around and keep track of all requirements, cash bonuses for opening, interest rates and duration, you can do something similar with cash accounts. For example, Capital One had an offer recently where you could receive $400 for opening a new checking account and have two automated deposits of at least $1,000 in 60 days.
Please note that NewRetirement has no affiliation with Capital One and the above example may no longer be available.
If you do a few of these a year, it is worth more than any high-yield savings account returns, but with many hoops to jump through.
8. In U.S. Savings Bonds
A bond represents a loan an investor makes. When you invest in a bond, you are guaranteed a specified return and your principle will be paid back on a predetermined date. Your returns are paid as interest and are not based on profits.
The vast majority of bonds that are bought and sold are done so through the secondary market, meaning between an investor to another investor, and not from the original borrower to an investor.
Government bonds typically offer slightly better interest rates than a savings account, without a lot of additional risk. U.S. Treasury bonds are backed by the federal government, meaning that you are most certainly assured you will get your money back. If you don’t, then the dollar probably doesn’t exist at that point, and we have much bigger problems to deal with.
Your returns are determined by how long you hold the bond. Current returns are around 0.03% for a one-month duration and 2% for a duration of 30 years, but these numbers can vary significantly.
As a comparison, since 1926, large stocks have returned an average of 10% per year while long-term government bonds have returned between 5% and 6%, according to investment researcher Morningstar.
The face value of a bond also changes as interest rates change. As interest rates go up, your bond would be worth less on the secondary market, as you have a lower interest rate than is otherwise available. If interest rates go lower (and in our case, negative, such as in Germany), your bond would be worth more.
Some state-government bonds also are tax-sheltered in the state that they are issued in, which might make them interesting to those of us in high income-tax brackets.
9. In Corporate Bonds
A corporate bond is a bond issued by a company rather than a federal, state or local government. They are considered to be a relatively safe investment, though far riskier than government-backed bonds.
Corporate bonds are reviewed for creditworthiness by rating agencies like Standard & Poor’s and Moody’s. Bond ratings are used to inform you about the stability of the bond in question, and the ratings help determine the interest rates that are paid.
Bonds with lower ratings, such as junk bonds and below-investment-grade bonds may have higher returns, but carry with them a much higher risk of default. Some bonds can even be called, meaning the borrower can elect to pay off the bond early. This occurs when the borrower can borrow funds from a different source at a lower interest rate. Always read the fine print.
10. Invest in a Fund
An investment fund is a portfolio of assets — usually stocks and/or bonds. Instead of investing in or lending to one company, you are investing in a group of companies, which spreads your risk.
There are many types of funds. and some may be better than others as a low-risk, high-return investment. Let’s take a closer look at five options:
An index fund is a concept that was invented by John Bogle, founder of Vanguard, as part of his thesis at Princeton. If you think successful long-term investing is about picking just the right stocks, think again. Bogle’s genius was not in knowing which stock to buy, but rather in knowing that some stocks will gain and some will lose but the overall market will gain over the long term.
An index fund is an investment made in an entire market, not individual sectors or companies. As Bogle famously said, “Don’t look for the needle in the haystack. Just buy the haystack.”
Index funds are also cap-weighted. This means that companies are held in proportion to their valuation. Large companies, such as Apple, are heavily weighted, while smaller companies are less so.
Stable Value Funds
Stable value funds are a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital. They are a common low-risk investment option inside of many 401(k) plans (there is very limited availability outside of 401(k)s).
Stable value funds are a portfolio of bonds that are insured to provide the investor with a reasonable guarantee of return (though they are not insured by the FDIC) of principal. And, as the name says, they return a stable rate of interest.
The interest rate is typically a few percentage points above money market funds. However, beware of fees.
Target Date Funds
A target-date fund (also known as a life cycle fund or age-based fund, or even abbreviated as a TDF) is an investment fund that automatically changes your investment portfolio from high-risk, high-reward to low-risk, low-reward options as you near your target date — the date when you want the money to be available to you for withdrawal.
The target date is usually identified in the name of the fund. So, if you want access to the money in or near 2045, you would pick a fund with 2045 in its name.
There are various pros and cons associated with target-date funds. You will definitely want to assess the fees on the investment. And, know that your money can be at risk and that you can’t take it out before the target date.
What if you think a certain TDF is too conservative? Then use a TDF with a date further down the line than when you want the money. This way, you will have a higher percentage of stocks for longer.
How about if a TDF is too aggressive for your taste? Do the opposite: choose a TDF with a date nearer than when you expect to use the money.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a fund of properties — typically income-producing assets like apartment buildings and hotels.
Tax-Exempt Mutual Funds
A tax-exempt mutual fund is a fund composed of investments that generate tax-free interest. These funds are offered by some investment firms.
To benefit from a tax-exempt mutual fund, you will need to invest outside of any tax-advantaged account and be in a higher tax bracket.
11. Look at Ladders
Investopedia defines laddering as “Buying multiple financial products of the same type — such as bonds or CDs — each with different maturity dates. By spreading their investment across several maturities, investors hope to reduce their interest rate and reinvestment risk.”
Learn more about bond ladders.
12. Consider Annuities
An annuity is an insurance product that guarantees income. They are popular with retirees who want to be assured that they will get a certain amount of income over a specified period of time.
In fact, according to a Towers Watson Retirement Survey, having predictable retirement income (presumably adequate income to cover all of your expenses) can help you feel happier. Conversely, the researchers discovered that retirees who must withdraw money from investments to pay for retirement expenses had the highest financial anxiety.
There are a lot of variations to consider when purchasing an annuity, but the following are a few popular options for retirees looking for income.
When you buy an annuity, you are exchanging a lump sum of money for an agreed-upon income stream to be paid over an agreed-up term.
The income stream can be variable — the amount you get varies each month along with interest rates or investment returns. Or, the income stream can be fixed — the amount you get remains the same no matter what is going on with the financial markets.
Fixed annuities are appealing to retirees because they transform your savings into predictable income.
You also specify the term of an annuity, payments can last for a specified number of years, or your lifetime — no matter how long that turns out to be.
Guaranteed Lifetime Annuities
A guaranteed lifetime annuity is a specific type of fixed-term annuity and is ideal for retirement. When you purchase this type of annuity, you are getting a guaranteed paycheck for as long as you live — no matter how long that turns out to be.
Multi-Year Guaranteed Annuities (MYGA)
A multi-year guaranteed annuity (MYGA). It is similar to an n-year Certificate of Deposit except that it is issued by an insurance company, instead of by the FDIC. It has a fixed interest rate (such as 3%) and you would have to hold it for “n” years (where “n” equals five years, for example). After five years, you get your investment plus the interest over that period of time. You can surrender it sooner but then there is an early withdrawal penalty.
They are not FDIC insured but do have some protection from your state’s insurance guaranty program (if the company should fail). Today, a five-year MYGA is going for about 3%. These products often have a minimum to invest (such as $10,000) and can be “surrendered” after that time period with that full rate of return.
13. Be Wary, but Just Go With Stocks (Lower-Risk Stocks, Anyway)
Low-interest rates can force investors into riskier securities. While there are absolutely zero guarantees with stocks and you could potentially lose all of your money with even the most conservative stock investment, there are stocks that are less risky than others.
If you think you can tolerate a stock investment for a low-risk (well … at best it is probably a medium risk) high-return investment, consider the following two possibilities:
There are two types of stock — common and preferred. Preferred stock trades like common stock, but act somewhat like bonds. Preferred shareholders have a higher claim on dividends than common stockholders, and, in the event of liquidation, have a preferred claim on assets over common stockholders — but less than bondholders.
Dividend-Paying Common Stock
In general, companies paying dividends tend to be higher quality with stronger balance sheets and less risk. And, even though they have less volatility, they outperform non-dividend-paying stock over time as well.
They can return an average yield of 3% plus capital appreciation.
14. Paying Off Your Mortgage
Paying off your mortgage and eliminating all debt can be a pretty good low-risk, high-return investment.
For example, if you have a mortgage at 3%, you could effectively earn 3% interest on the value of the mortgage balance because it is no longer subject to interest.
Plus, it will improve your cash flow.
When it comes to getting advice from Certified Financial Planners (CFPs), it’s usually not in their best interests to recommend you pay down your mortgage. Why?
Most CFPs are paid on a percentage of assets managed (AUM). The more assets they manage, the more they take home. Diverting funds from your portfolio to pay down your mortgage inherently means that your CFP will earn less money. This is why looking for an adviser paid on an hourly basis keeps you and your adviser aligned.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
My husband and I recently purchased our first rental property. Over the past few months, we’ve repaired and renovated the 1930s-era home, and are starting to look for tenants.
And it turns out, our timing couldn’t be better: The Tax Cuts and Jobs Act made several changes for rental property owners that portend a more profitable enterprise than it used to be.
“For rental property owners, [the act] will generally benefit you,” says Thomas Castelli, a New York City–based certified public accountant and tax strategist with the Real Estate CPA, a firm focusing on real estate tax.
How exactly the federal tax changes apply to individual property owners can vary, so Castelli recommends seeking out a tax professional well-versed in real estate to help sort things out. But here’s a general overview of some of the new tax rules that will most likely affect rental real estate owners—including me.
Landlords can deduct a big ‘bonus’ the first year
Blame it on wear and tear or just the passage of time, but in the eyes of the IRS, rental property depreciates over time. For landlords, that’s a tax break—typically one that’s spread out over several years.
The good news? During the first year of owning a rental property, landlords can take a “bonus” depreciation deduction. In the past, that deduction maxed out at 50% of the property’s value. But under the new tax act, that deduction doubled, to a max of 100%, which could amount to the entire sum you paid for the place. In other words, it’s a huge chunk of change!
This bonus deduction would be netted against revenue, which, in many cases, would make rental income show a loss, Castelli says.
“So you won’t be paying tax on your rental income,” he says. “I’d say that’s probably the biggest and most important change or most beneficial change to rental real estate investors.”
Keep in mind, though, that your property has to qualify. One, it must be placed in service (meaning available for rent) after Sep. 27, 2017, and before Jan. 1, 2023. Two, all or part of the property must have a “class life” of less than 20 years. Since most properties typically have a class life of 27.5 years, it would need to be reclassified as a five-, seven-, and 15-year property in order to take advantage of the bonus depreciation. (A CPA can help with this.)
“Let’s say you have a property worth $100,000, and you can get 20% of that reclassified as a five-, seven- and 15-year property,” Castelli says. “That’s a $20,000 deduction.”
Watch: 5 Pet-Related Tax Deductions We Bet You Didn’t Know Of
Up to 20% of rental revenue can be tax-free
While rental income is taxed, the tax act could offer landlords a nice tax shelter of sorts where up to 20% of that rental income is tax-free.
“What that means is for every $100 of taxable rental income, it’s possible that you only pay tax on $80 worth of it,” says Amanda Han, a certified public accountant and assistant managing director at Keystone CPA, in Fullerton, CA.
How it works: Section 199A of the IRS code provides some taxpayers with a deduction for qualified business income. In the past, there was much confusion about whether this applied to landlords, but the IRS issued a clarification, providing a safe harbor for a “rental real estate enterprise” to be treated as a business.
“That is helpful for a lot of landlords, and is available as long as it’s rental income,” Han says.
Landlords can deduct more home improvements immediately
In the past, landlords could deduct repairs to a rental property immediately, but home improvements were depreciated over time. This has often caused confusion for landlords.
“What is a repair versus what’s an improvement?” Han asks. “There were always questions about that, because repairs we deduct immediately; improvements we have to depreciate.”
Yet the tax act simplified those rules. Under section 179, the IRS increased the immediate deduction threshold for home improvements to $2,500 per item. In other words, money spent on improvements under $2,500 can be deducted immediately, rather than going through the complicated depreciation process.
One negative: Some landlord losses are now capped
One new aspect that could sting rental owners relates to losses on the property. A loss occurs when a property’s expenses total more than rental income. Previously, owners of rental real estate could take unlimited losses from their rental real estate. The tax act now limits those losses to $250,000 for a single person and $500,000 for married couples, Castelli says.
The upside: Since these limits are quite high, Castelli says this change will not affect most individual rental-property owners.
How to make the tax act work for you
The tax act has been better than expected for rental property owners, Han says. “It’s a great opportunity for real estate investors.”
Good record-keeping is essential for rental owners, and Han recommends property owners keep sales closing disclosures, purchase closing disclosures, refinancing documents, and receipts for anything to do with the home for at least three years.
For more smart financial news and advice, head over to MarketWatch.
By midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year without penalty. Well before the deadline, have you hunted and gathered all your documents, looked for a tax pro or software, and learned about any new tax credits or deductions you might be eligible for?
You should have received a Form W-2 by Jan. 31 or, with any mail delay, soon thereafter. The same deadline applies to certain 1099-MISC forms for independent contractors. Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by Jan. 31 as well.
Waiting until the last minute to prepare for tax filing is never advisable. If taxpayers work for one employer, their taxes may not be complicated, but if they have side gigs or they’re self-employed, tax returns can take a while to fill out.
7 Tax Prep Tips for 2021
Before taxpayers file, here are some tasks they need to do.
1. Decide on Hiring a Pro or DIY
Taxpayers can either prepare and file their taxes on their own or hire a professional. If they choose the latter, they can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro.
The costs for a professional vary, and the more complicated a return is, the higher the costs will be.
The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications.
If you’re going it alone, IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income.
• You can file on an IRS partner site if your adjusted gross income was $72,000 or less. This is a guided preparation, and the online service does all the math. • Those with income above $72,000 who know how to prepare paper forms and can do basic calculations can fill out and file electronic federal tax forms. (There is no state tax filing with this option.)
2. Collect Tax Documents
By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and 1099s for contract workers or freelancers.
Employers will send the documents in the mail or electronically.
Investors might receive these forms:
• 1099-B, which reports capital gains and losses • 1099-DIV, which reports dividend income and capital gains distributions • 1099-INT, which reports interest income • 1099-R, which reports retirement account distributions
Other 1099 forms include:
• 1099-MISC, which reports payments in lieu of dividends • 1099-Q, which reports distributions from education savings accounts and 529 accounts
If taxpayers won anything while gambling, they’ll need to fill out Form W-2G. If they paid at least $600 in mortgage interest during the year, they’ll receive Form 1098, whose information can be used to claim a mortgage interest tax deduction.
A list of income-related forms can be found on the IRS website.
Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used.
3. Look Into Deductions and Credits
Take the standard deduction or itemize deductions? The higher figure is the winner.
The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.
For tax year 2020, the standard deductions are:
• $12,400 for a single filer • $24,800 for a married couple filing jointly • $12,400 for a married couple filing separately • $18,650 for a head of household
Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, health care deductions, and investment-related deductions.
The IRS notes that you may benefit from itemizing deductions if any of these apply:
• Don’t qualify for the standard deduction. • Had large uninsured medical or dental expenses during the year. • Paid interest and taxes on your home. • Had large uninsured casualty or theft losses. • Made large contributions to qualified charities. • Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.
Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.
There are family and dependent credits, health care credits, education credits, homeowner credits, and income and savings credits.
Taxpayers can see the entire tax credits and deductions list on the IRS website.
4. Make a Final Estimated Tax Payment
Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change.
In 2020, the first two quarters of taxes were due on July 15. The third was due on Sept. 15, and the fourth was due on Jan. 15, 2021.
5. Apply for a Payment Plan If Needed
Another way to prepare for taxes is to apply for a payment plan with the IRS, if that seems necessary.
Just know that penalties and interest will accrue until you pay off the balance.
For the 2020 tax year the IRS issued revised COVID-related collection procedures . They include:
• Taxpayers who qualify for a short-term payment plan may now have up to 180 days to resolve their tax liabilities instead of 120 days. • Qualified individual taxpayers who owe less than $250,000 may set up installment agreements without providing substantiation or a financial statement if their monthly payment proposal is sufficient. • The IRS is offering flexibility to some taxpayers who are temporarily unable to meet the payment terms of an accepted offer in compromise (settlement of a tax bill for less than the amount owed). With a long-term payment plan, taxpayers may pay taxes for a period of more than 120 days with monthly payments.
In general, the payment plans are available to individuals who owe $50,000 or less in combined income tax, penalties, and interest or businesses that owe $25,000 or less, combined, that have filed all tax returns.
A short-term payment plan has a $0 setup fee online, by phone or mail, or in person.
A long-term payment plan has a $31 setup fee online, or $107 by phone, mail, or in person. (The setup fee is waived for low-income payers.)
Taxpayers can pay for the plans on the IRS’s website.
6. Decide Whether to File for an Extension
If you need more time to prepare your federal tax return, you can electronically request an extension until Oct. 15 to file a return.
To get the extension, you must estimate your tax liability and pay any amount due by April 15 to avoid penalties.
7. Look Into CARES Act Provisions
The CARES Act was passed in March 2020 to help Americans during the COVID-19 crisis. The act included the Federal Pandemic Unemployment Compensation program, which gave people who were collecting unemployment compensation an extra $600 per week through July.
At the end of 2020, the president signed a $900 billion coronavirus relief bill, which gave people earning unemployment an extra $300 per week for up to 11 weeks.
Unemployment assistance does count as income, which means the base amount and the enhancements of $600 and $300 are taxable.
Most government agencies were to provide a paper copy of Form 1099-G, reporting unemployment compensation, by Jan. 31 of the year after the year of payment.
Other programs under the CARES Act aimed to assist struggling business owners. They include the Paycheck Protection Program, the Employee Retention Credit, Economic Injury Disaster Loans, and Payroll Tax Postponement.
The PPP program gave employers the chance to borrow up to 2.5 times their average monthly payroll, or up to $10 million, to cover workers’ paychecks. A forgiven PPP loan is not taxable under federal law, and business owners can deduct qualifying expenses paid with the money from the forgiven PPP loan, according to the U.S. Small Business Administration.
With Economic Injury Disaster Loans, business owners could borrow up to $2 million or they could receive a cash advance, which would not need to be repaid, up to $10,000. Emergency EIDL advances aren’t included in income, and taxpayers can deduct business expenses they paid using the advance, Bloomberg Tax notes.
The Employee Retention Credit , which gave employers a tax credit for keeping workers on the job, could reduce expenses that business owners would otherwise pay on their federal return and is not counted as income, according to the IRS.
Special Distribution Provisions
Another CARES Act provision provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.
The IRS lays out the rules in a piece titled “Coronavirus-related relief for retirement plans and IRAs, questions and answers.”
In general, an individual could take a distribution of up to $100,000 from employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs without the typical 10% additional tax on early distributions (before age 59½).
The provision also increases the limit on the amount that a qualified individual can borrow from a retirement plan. An IRA does not count. It permits a plan sponsor to offer qualified individuals up to one additional year to repay their plan loans, too.
The criteria for qualified individuals can be found on the IRS’s website, but it basically says that individuals who had the coronavirus or had a spouse or dependent with the virus, or who experienced financial hardship because of coronavirus would be eligible.
“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable isn’t the best choice. Prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY, and learning about new tax credits and deductions.
Still have questions about preparing for taxes? SoFi’s Tax Help Center can answer tax questions as they apply to investing, stock options, loans, college, and retirement accounts.
You can also find out more about coronavirus tax relief, check your tax refund status, and make a tax payment from the hub.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement. Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners. SOCO20117
Do you have a home equity loan or home equity line of credit (HELOC)? Homeowners often tap their home equity for some quick cash, using their property as collateral. But before doing so, you need to understand how this debt will be treated come tax season.
With the 2018 Tax Cuts and Jobs Act, the rules of home equity debt changed dramatically. Here’s what you need to know about home equity loan taxes when you file this year.
Acquisition debt vs. home equity debt: What’s the difference?
For starters, it’s important to understand “acquisition debt” versus “home equity debt.”
“Acquisition debt is a loan to buy, build, or improve a primary or second home, and is secured by the home,” says Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.
That phrase “buy, build, or improve” is key. Most original mortgages are acquisition debt, because you’re using the money to buy a house. But money used to build or renovate your home is also considered acquisition debt, since it will likely raise the value of your property.
Home equity debt, however, is something different.
“It’s if the proceeds are used for something other than buying, building, or substantially improving a home,” says Jucoski.
For instance, if you borrowed against your home to pay for college, a wedding, vacation, budding business, or anything else, then that counts as home equity debt.
This distinction is important to get straight, particularly since you might have a home equity loan or HELOC that’s not considered home equity debt, at least in the eyes of the IRS.
If your home equity loan or HELOC is used to go snorkeling in Cancun or open an art gallery, then that’s home equity debt. However, if you’re using your home equity loan or HELOC to overhaul your kitchen or add a half-bath to your house, then it’s acquisition debt.
And as of now, Uncle Sam is far kinder to acquisition debt than home equity debt used for non-property-related pursuits.
Interest on home equity debt is no longer tax-deductible
Under the old tax rules, you could deduct the interest on up to $100,000 of home equity debt, as long as your total mortgage debt was below $1 million. But now, it’s a whole different world.
“Home equity debt interest is no longer deductible,” says William L. Hughes,a certified public accountant in Stuart, FL. Even if you took out the loan before the new tax bill passed, you can no longer deduct any amount of interest on home equity debt.
This new tax rule applies to all home equity debts, as well as cash-out refinancing. That’s where you replace your main mortgage with a whole new one, but take out some of the money as cash.
For example, say you initially borrowed $300,000 to purchase a home, then over the course of time paid it down to $200,000. Then you decide to refinance your loan for $250,000 and take that extra $50,000 to help your kid pay for grad school. That $50,000 you took out to pay tuition is home equity debt—and that means the interest on it is not tax-deductible.
Limits on tax-deductible acquisition debt
Meanwhile, acquisition debt that’s used to buy, build, or improve a home remains deductible, but only up to a limit. Any new loan taken out from Dec. 15, 2017, onward—whether a mortgage, home equity loan, HELOC, or cash-out refinance—is subject to the new lower $750,000 limit for deducting mortgage interest.
So, even if your sole goal is to buy, build, or improve a property, there are limits to how much the IRS will pitch in.
When in doubt, be sure to consult an accountant to help you navigate the new tax rules.
For more smart financial news and advice, head over to MarketWatch.
Learn how to get your finances in order and chart a new course after divorce.
Like so many single parents, Emma Johnson, 40, founder of WealthySingleMommy.com, worried about rebuilding financially after divorce and what the financial future would look like for her and her children, who were 2 and under 1 at the time.
“I was terrified that my kids and I would be living out of our car,” she says, “or that I would have to sell my home and move far from our community.”
Rather than continuing to see the prospect of managing finances after divorce as frightening, Johnson decided to use the life-changing 2010 event as an opportunity to re-evaluate her plans and create an exciting new future. She resumed working as a journalist and started her blog. This ultimately led to brand partnerships, speaking engagements and a book deal with Penguin Random House, not to mention new financial goals, including saving enough to retire by the time her children go to college.
“It is very scary to start out on life anew and without a partner,” she says. “Harness this fear to forge a new, exciting path that is free from an unhappy marriage. Your Plan B or C or Q can be far, far more fulfilling than you imagined.”
From separating joint bank accounts after divorce to revamping your financial plans, here are four things you can do to get your finances in order and chart a new course after divorce:
1. Update your budget
Getting divorced can come with financial costs and changes. From attorney’s fees to the tax consequences of selling assets, you may face some short-term financial expenses that could put a strain on your budget. For many people, managing finances after a divorce means spending less because you’ll only have your own income to draw on, and you might have to pay child support.
Jackie Pilossoph, 51, founder of Divorced Girl Smiling, got divorced in 2008 and found that getting a detailed understanding of what she was spending and what she was bringing in was critical. It helped her find places in her budget where she could cut back.
“I called all my utility companies and had the bills lowered, either through cutting plans or getting a better deal. I put a cap on Starbucks and allotted myself a weekly amount,” she says. “I also stopped buying bottled water, refinanced my home, stopped getting my nails done and basically didn’t buy myself a stitch of clothing for about two years.”
Other ways to trim costs and manage finances after divorce might include finding opportunities to save on attorney’s fees or making budgetary changes like downsizing your home, eating at home more often or even scaling back your children’s extracurricular activities.
While these changes can be difficult to make, Johnson, of WealthySingleMommy, believes that you need to be open to a new lifestyle after a divorce in order to create a future on firm financial footing.
“Let go of trying to maintain the lifestyle you had while married,” she says. “You don’t need the stress associated with being over-leveraged on a home, living in debt, penny pinching or living paycheck to paycheck.”
“The good thing about divorce is that you are solely responsible for your financial future from this point forward. When you start seeing financial success from your own plan and your own job, there is no better feeling.”
2. Evaluate your accounts
Just because you had certain kinds of banking and investment accounts as a couple doesn’t mean they’re necessarily right for you now as you rebuild financially after divorce.
“For both practical and emotional reasons, you need to evaluate every part of your financial picture during and after divorce,” Johnson says. “You now have to plan for a life without a spouse and invest appropriately based on your new lifestyle, goals and dreams.”
She suggests asking your accountant about your new tax situation, your financial planner about college, emergency savings and retirement planning and your attorney about estate planning. You could even explore finding an investment adviser who specializes in managing finances after a divorce.
Take the time to understand the details of your various accounts, such as how much you’re paying per month in fees, how many no-fee transactions you get and how much you’re earning (or paying) in interest. Perhaps you don’t need the pricier checking account that includes so many transactions. Or maybe your bank requires a high minimum balance to waive the monthly fee on your savings account, and now you’re looking for an account that has no monthly fee for maintenance. Maybe you do need a new credit card since your old one was a joint account shared with your ex.
If you’re taking stock of your joint bank accounts after divorce and close any credit accounts, pull your credit report to make sure all joint accounts are closed. If you want to ensure that new credit accounts aren’t opened in your name, you could consider putting a credit freeze on your report by contacting the three national credit reporting agencies: Equifax, Experian or TransUnion.
When thinking about joint bank accounts after divorce, you may also consider removing your ex-spouse as a beneficiary on retirement accounts, life insurance policies and from your will.
3. Define your goals and priorities
Just because you and your former spouse wanted to retire to Hawaii doesn’t mean that’s still your dream now.
“One of the saddest things about divorce that I hear from men and women is that the dream they always had is gone,” Pilossoph says, explaining that feeling is often only temporary. “What happens over time is that the dream just changes, and honestly, most of the time, it changes for the better.”
For Pilossoph, that’s meant that she’s developed dreams of retiring and moving to a warm Southern state, which she hopes to achieve alone or with a different partner.
She believes that rebuilding financially after divorce is a great time to rethink what you want to do professionally as well. Maybe you would rather stay home with your children, switch careers, find a better work-life balance or go back to school.
“Divorce is a great time for soul searching,” she says. “Divorce often makes people re-evaluate life and explore what is really going to make them happy.”
4. Sit down with a financial planner
Rebuilding financially after divorce and setting up a new financial plan can help you feel better prepared for life after your marriage ends. Although Pilossoph wanted to continue to stay at home with her children, who were 3 and 5 at the time, her financial planner helped her realize that wasn’t a good financial decision over the long term.
“It took a really good financial planner to get me to sit down and face reality. They forced me to look at what I was spending every month and what I was bringing in,” she says. “They made me see the deficit I was dealing with, and seeing the numbers on paper made me realize I had to make some changes.”
In addition to cutting back on expenses, she decided to return to work. She wrote a book, launched her blog and took a job with a newspaper.
A financial planner can be a critical resource when managing finances after a divorce, helping you turn your new short- and long-term financial goals into realities. They can clarify what you need to earn, how you need to save for retirement or your children’s futures and how your newly single status affects your taxes.
Stay focused on the positives
While divorce is undoubtedly an end to something important in your life, it is also a new beginning. If you look at it from that perspective, you may find it easier to focus your attention on rebuilding financially after divorce, rather than mourning the changes in your financial situation.
“The good thing about divorce is that you are solely responsible for your financial future from this point forward,” Pilossoph says. “When you start seeing financial success from your own plan and your own job, there is no better feeling. Looking in the mirror and being proud of your accomplishments and the way you live your life is very powerful.”
First of all, if you are reading this for personal financial reasons, then congratulations. As a recipient of employer stock options, you have the opportunity to own shares of your company. Stock options can be a powerful wealth-builder. If granted, chances are you have a windfall headed your way. Be sure to have a plan in place regarding the exercise of those options and subsequent sale of stock.
There are several considerations that should factor prominently in your decision-making process. These actions may have major tax implications and, if done improperly, could effectively reduce the amount of that windfall.
When formulating a plan to exercise your stock options, there are some important questions to ask: What exactly is your stock option? When can you move on that stock? What are the tax implications? What valuation does your company have?
Understanding what type of stock options you own is significant when considering your financial position and determining your next move. Stock options come in a few varieties. Incentive stock options (ISOs) are a company benefit that give an employee the right to buy shares at a discounted price, while delaying taxes due until those shares are sold. With non-qualified stock options (NSOs) taxes are due both when you exercise the option (purchase shares) and sell those shares.
Another common employee compensation package is restricted stock units (RSUs). RSUs give an employee interest in company stock but have no tangible value until vesting is complete. It is important to know which type of options you have, and the implications of each.
Timing the Sale of Your Stock
Be sure to understand the earliest date at which your stock can be sold as a long-term capital gain. This tax-advantaged rate applies to stock held more than one year. Additionally, two years must have passed since the option to buy those shares was granted. Remember, you may have a post-IPO lockup period during which you will not be able to sell stock. A lockup period is a window of time when company insiders are not allowed to redeem or sell shares of their company. Lockup periods can vary but typically span six months post-offering.
A common strategy is exercising options six months before the IPO, which starts your stock holding period. Assuming a six-month lockup, any stock you sell thereafter will be taxed as a long-term gain, as you have now held the stock for one year. This strategy gives you flexibility to exit your position at the lower capital gains rate and earliest calendar date possible if you have concerns about your company’s prospects or need liquidity. On the contrary, if you think the stock could soar, you can hold it. Regardless, the early exercise of options gives you, well, options.
Plan Ahead for Alternative Minimum Tax Issues
If you exercise ISOs be aware of the rules surrounding the Alternative Minimum Tax (AMT.) The AMT applies to taxpayers with high income by setting a limit on deductions and exclusions. It helps to ensure that certain taxpayers pay at least a minimum amount of tax.
If you are subject to the AMT, exercising ISOs may count against you in the year in which they are exercised, so take into account the probability that your company will be successfully brought to market. Early exercise could negatively affect your balance sheet if the IPO is delayed or canceled and you were planning to pay that AMT with proceeds from the sale of stock to the public. For example, COVID-19 surely threw a wrench in the gears of recent IPOs such as Airbnb and likely in the plans of many executives standing to profit from it.
On the other hand, if you pay AMT on exercised ISOs when company stock is low, you may not get hit with it again after selling the stock at a later date. If it soars after the IPO, then exercising and paying AMT early would have been a smart move.
Valuation: Get an Idea of What Shares Are Worth
In the public stock market, there is a published bid-ask spread for each security throughout the trading day, thus providing a means of valuation for a stock or option. In the private marketplace, the valuation of a company is less clear because it is calculated infrequently. While there are some “exchanges” for private shares, transactions occur infrequently, and the bid-ask spread is often wide. You could certainly estimate based upon the most recent funding round or Venture Capital firm valuation.
Additionally, many private company values are based on the most recent 409(a) valuation. A 409(a) is an independent appraisal of the fair market value (FMV) of a private company’s common stock. Long story short: You can’t make a decision to exercise an option without understanding what a share of stock is worth.
Hire a Pro
DIY projects frequently end up costing a homeowner more money than just hiring a pro in the first place. As you review your stock options, it’s important to consider all variables. Having a team of trusted advisers by your side who can properly evaluate your stock options, portfolio and goals can bring you confidence that you are making informed decisions.
A certified public accountant (CPA), a financial planner and estate attorney should be vital members of your decision-making team when navigating your ownership interests from private to public. A CPA can typically model your estimated tax liabilities given your unique circumstances. If your windfall is substantial enough, a financial planner and estate attorney will strive to ensure your wealth is preserved for yourself and future generations through proper planning. Be sure to hire the right person for the job — preferably someone who has dealt with the complex circumstances surrounding private stock, stock options and IPOs.
Every company is different, as is every IPO. It is important to read the fine print regarding your rights and requirements as the holder of options or stock in a private company before deciding what to do in the months before and after an IPO. If uncertain, be sure to consult professionals with experience in this area.
Content in this material is for general information only and not intended to provide specific advice, tax advice or recommendations for any individual. We suggest that you discuss your specific tax issues with a qualified tax adviser. Securities and advisory services offered through LPL Financial, a Registered Investment Adviser, Member FINRA/SIPC.
Financial therapy is a relatively new field that combines the emotional support of a psychologist with the money mindset of a financial planner.
Seeing a financial therapist can allow clients to begin to process their underlying feelings about money, while working out plans for retirement, savings, investments and other goals.
Financial therapists (sometimes referred to as financial psychologists) also work to lessen that stress that often comes with money concerns, and try to help their clients develop a more sustainable and healthy relationship to money.
Financial therapists can also help couples overcome differences in their approach to saving and spending, which can help mitigate money fights, and enable them to work together more as a team.
Read on to learn if you might benefit from this type of professional counseling, and, if so, how to find a financial therapist that is the right fit for you.
How Financial Therapy Works
According to the Financial Therapy Association (FTA) , financial therapy is a process informed by both therapeutic and financial expertise that helps people think, feel, and behave differently with money to improve overall well-being.
The profession sprang out of increasing evidence that money can be intrinsically tied to our hopes, frustrations, and fears, and also have a significant impact on our mental health.
According to a recent survey by the American Psychological Association , 72 percent of Americans reported feeling stressed about money at least some time in the prior month.
Money can also have a major impact on our relationships.
Indeed, research has shown that fighting about money is one of the top causes of conflict among couples, and one of the main reasons married couples land in divorce court.
And, while it might seem like bad habits and money arguments are things you can simply resolve on your own, the reality is that it’s often not that simple.
Many financial roadblocks, such as chronic overspending or constantly worrying about money, often aren’t exclusively financial. In many cases, psychological, relational and behavioral issues are also at play.
Financial therapy can help patients recognize problematic behaviors, and how various relationships and experiences may have led them to develop those behaviors as coping mechanisms or to form unrealistic or unhealthy beliefs.
Along with offering practical financial advice, a financial therapist can reduce the feelings of shame, anxiety, and fear related to money.
The reasons why financial therapy can help are the same as why traditional psychological therapy can help: It can lead people to understand that they can do something to improve their situation. That, in turn, can instigate changes and healthier behaviors.
Like conventional therapy, the number of sessions needed will vary, depending on the situation. A financial therapy relationship can last from a few months to longer.
Generally, a financial therapist’s work is “done” when you feel your finances are orderly and you have the skills to keep them that way in the future.
Financial Therapists vs. Financial Advisors
Financial advisors are professionals who help manage your money.
They are typically well-informed about their clients’ specific situations and can help with any number of money-related tasks, such as managing investments, brokering the purchase of stocks and funds, or creating a tax plan.
However, psychological therapy is not a financial advisor’s area of expertise, and if a person requires real emotional support or needs help breaking bad money habits, a licensed mental health professional, such as a financial therapist, should likely be involved.
A certified financial therapist (someone trained by the FTA) can work with you specifically on the emotional aspects of your relationship with money and provide support that gets to the root of deeper issues.
Due to the interdisciplinary nature of financial therapy, professionals that enroll in FTA education and certification include: psychologists, marriage and family therapists, social workers, financial planners, accountants, counselors, coaches, students and academics.
Do You Need a Financial Therapist?
If you’re considering whether a financial therapist could help you, you may want to think about your general relationship to money.
If you feel you have anxiety about money, or unhealthy behaviors and feelings when it comes to spending, budgeting, saving, or investing, you might benefit from exploring financial therapy.
Some red flags that you might benefit from a financial therapist include:
• Chronically paying bills late. • Holding unhealthy spending habits (such as gambling or compulsive shopping). • Overworking oneself to hoard money. • Completely avoiding financial issues that need to be addressed. • Hiding finances from a partner.
Often, unhealthy saving, spending, or working habits are a symptom of other bad habits related to mental or physical health.
Keep in mind that it’s possible to have an unhealthy relationship with money even if your finances are good on paper.
Finding a Financial Therapist
Like choosing any therapist, you often need to shop around a bit to find the right fit—someone you feel you can relate to, trust, and you also feel understands you.
For those who may not have access to a financial therapy professional in their backyard, many offer services via video conferencing.
You can start your search with the Find A Financial Therapist tool on the FTA website, which features members and lists their credentials and specialties.
Your accountant or financial counselor might also be a good source of referrals.
As with choosing any other financial expert or mental health professional, it’s a good idea to speak with a few potential candidates.
In your initial conversations with candidates, you may want to discuss the therapist’s training and expertise, as well as your needs and situation.
Financial therapists have a wide variety of backgrounds, so it is important for consumers to learn as much as they can about that individual’s practice, expertise, and ability.
You may even want to ask them how they define financial therapy themselves because approaches and definitions vary from one professional to another.
It can also be a good idea to ask how long they have been providing financial therapy services, what their fees are, as well as if some or all of the fee may be covered by your medical insurance.
Financial therapy merges finance with emotional support to help people cope with financial stress, learn to make better financial decisions, and develop better money habits.
If you frequently feel stressed and/or overwhelmed when you think about money–or you simply avoid thinking about money as much as possible–you might be able to benefit from at least a few sessions of financial therapy.
While it might seem like hiring a financial therapist is another expense that could complicate an already difficult financial situation, it might be better to view it as investment in your emotional and financial wellness, one that could help you build financial stability and wealth in the future.
Another way to get–and stay–on top of your finances (that you do on your own) is to open a SoFi Money® cash management account.
SoFi Money can help simplify your financial life by allowing you to earn competitive interest, spend and save–all in one account.
And SoFi Money makes it easy to track your weekly spending and saving in your dashboard within the app.
Check out everything a SoFi Money cash management account has to offer today!
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It’s many people’s least favorite time of year: tax season.
Between frantically searching for your tax forms, organizing your receipts, figuring out how much it’ll cost you to file and trying to remember the most recent updates to the tax code, tax season can be stressful … to say the least.
Thankfully, some smart software companies have made the process way easier — and, in some cases, even free.
Even the tax pros themselves are getting on board.
“I actually informally started my own tax practice using TurboTax to prepare people’s returns from my kitchen table,” said Ben Rugg, CPA.
So you can rest assured your taxes are in good hands with online tax filing services — and save yourself a boatload of money and stress.
Best Tax Software 2021: At a Glance
The three best online tax programs with paid plans are undoubtedly TurboTax, H&R Block and TaxAct. Here’s a quick look at how they stack up.
Note: The prices below are accurate as of Jan. 27, 2021 but may fluctuate throughout tax season.
Each of these three tax prep services offers a similar suite of options that are split among their free and paid tiers. The details and prices vary among them, so take a look at the features that are important to you to see which product is the right fit.
Tax Software Features, Compared
Each tax preparation service includes a free option for basic filers. What each covers varies, so which is best for you depends on how complex your tax situation is.
H&R Block: H&R Block’s most basic online version covers earners whose wages come entirely from W-2 income, and also includes deductions for student loan interest and child tax credits.
TurboTax: The TurboTax Free Edition covers W-2 income, the Earned Income Tax Credit (EIC) and child tax credits.
TaxAct: This tier covers W-2 income; and tax breaks for dependent deductions, Earned Income Tax Credit (EITC) and other child tax credits, student loans and education expenses for current students, and retirement income.
Support for Complicated Returns
Each service offers almost identical paid tiers for more complicated tax returns: a “Deluxe” and a “Premier” or “Premium” tier.
These tiers help you prepare your taxes when you have additional deductions and credits to claim, or you have income from anywhere other than an employer.
H&R Block: Deluxe covers additional deductions related to things like home ownership, charitable donations and Health Savings Accounts (HSAs). You’ll need Premium to cover income from freelancing, contract work, investments or real estate.
TurboTax: Deluxe covers mortgage and property tax deductions, charitable donations, student loan interest, education expenses and 1099-MISC income from freelancing or contract work. Premier covers investment and rental property income, and refinancing deductions.
TaxAct: TaxAct Deluxe is more comprehensive than the others; it covers itemized deductions, mortgage interest, real estate taxes, student loan interest, Health Savings Accounts (HSAs) and adoption credits. Premier adds options for investors, people earning royalties or K-1 income, rental property owners and foreign bank account holders.
Each service includes support for self-employment income in less expensive tiers.
But if the majority of your income comes from self-employment of any kind — as a freelancer, independent contractor or small business owner — you’ll benefit from tax prep support specifically tailored for self-employment and small business owners.
These versions are the most expensive of the basic online filing options, but they cost significantly less than paying an individual accountant to prepare your taxes. They’re a budget-friendly way to tackle your complicated paperwork and ensure you don’t miss out on vital tax breaks.
All three services provide the same basic support for self-employed filers, but here are some highlights that could help you choose:
H&R Block: An interview-style process walks you through industry-specific expenses and deductions you might miss on your own, and you’ll have access to tools covering asset depreciation.
TurboTax: Get a host of perks designed specifically for freelancers, including deductions for your line of work, ability to import your 1099-MISC with a photo, free access to Quickbooks Self Employed and access to a year-round tax estimator after filing.
TaxAct: Gain the ability to calculate personalized business deductions, calculate depreciation and access year-round planning resources.
Live Tax Assistance
All three companies offer tax help from real, live tax professionals — and this option is where they differ the most. Pay attention to these options if live tax support is important to you!
H&R Block: This is the only of the three that runs brick-and-mortar locations, where you can meet with a tax pro face-to-face. It also lets you upload documents online or drop off paperwork to let them prepare everything for you. Like the others, H&R Block also offers online assistance; you can pay an additional fee to get on-demand access from a tax professional while you prepare your returns through the DIY software.
TurboTax: In place of the DIY products, you can purchase TurboTax Live in similar tiers for on-demand answers to your questions and a line-by-line review of your returns by a CPA or EA.
TaxAct: TaxAct builds live assistance into its tiers. You can’t get it with the free version. Deluxe includes live phone support. Premier and Self-Employed include live phone support plus screen sharing.
H&R Block or TurboTax should be your go-to services if you’re concerned about a complicated tax audit. TaxAct doesn’t provide audit support for most customers.
H&R Block: The company’s Peace of Mind Extended Service Plan lets you take in any notification from the IRS to figure out what it means and get access to representation by an H&R Block enrolled agent if you need it.
TurboTax: Through its Audit Support Center, TurboTax customers get access to live, one-on-one guidance online in case of an audit.
TaxAct: TaxAct does NOT provide audit support itself. It gives TaxAct Professional users (tax pros filing taxes for clients) access to third-party service Protection Plus Audit Defense.
H&R Block, TurboTax and TaxAct all have mobile apps available for both iOS and Android. All three offer comparable functionality, though TaxAct’s apps are rated a little lower in their respective app stores than the other two.
Need money now? H&R Block and TurboTax both offer a tax refund advance, while TaxAct does not. An advance from H&R Block will cost you a lot more than one from TurboTax.
H&R Block: The Emerald Advance line of advance credit to put up to $1,000 of your tax refund in your pocket before you file through a Mastercard debit card with a $45 annual fee and 36% interest rate.
TurboTax: The service offers an advance up to $3,000 (typically around 50%) of your expected federal tax refund with 0% interest and $0 loan fees. Eligible customers get access to funds within a few hours via Visa debit card.
TaxAct: TaxAct doesn’t offer a tax refund advance.
Pay with Your Refund
All three services let you use your tax refund to pay for product and filing fees, so you never see an out-of-pocket cost for your tax preparation. The competition is in the fees.
H&R Block: $39.
TaxAct: $17.99 if you’re receiving your refund by direct deposit or $9.99 if you’re receiving it on a PayPower reloadable debit card.
The companies offer different levels of peace of mind for using their products.
H&R Block: If there’s an error in your tax return, H&R Block will reimburse you for up to $6,000 in additional taxes owed due to its mistake.
TurboTax: If you tally up a larger refund (or similar tax liability) with another tax preparation service, TurboTax will refund your fee (or pay you $30 if you used the Free edition).
TaxAct: If there’s an error on your tax return, TaxAct will reimburse you for up to $100,000 in additional taxes owed dues to its mistake, plus refund your TaxAct fees. If you’re not totally satisfied with TaxAct for any reason, you can discontinue using it before completing your return and paying the fee.
To prepare and file your taxes online with each service, you’ll pay a product fee, filing fees for state returns, and — depending on the company — fees for live tax professional assistance.
Here’s how they compare.
Alternatively, you can download tax preparation software from each company, so you can save your tax information on your own computer. Software products are tiered similar to online tiers and include a one-time download fee and filing fees.
H&R Block vs. TurboTax vs. TaxAct: Which Is Best for You?
Any of these popular, tested tax preparation services are a good fit for you if you want to DIY your tax returns this year and file online — with added assurance from software or tax pros that you’re doing everything right.
Here are a few standout differences among H&R Block, TurboTax and TaxAct that might help you pick the best product for your situation.
H&R Block is best for you if…
You want access to in-person tax pros. H&R Block is the only of these three services that runs brick-and-mortar offices where you can work with tax pros face-to-face.
You’re concerned about a complicated audit. Both TurboTax and H&R Block provide audit assistance, but H&R Block’s service offers a better user experience and is available in-person — which could be comforting in a stressful situation.
You own a small business. All three services provide ample support for self-employed filers, but H&R Block has the most robust suite of services for year-round tax support.
TurboTax is best for you if…
You want live, online help. TurboTax offers online assistance with tax pros comparable to H&R Block’s service at a lower price, and Free filers get free online assistance.
You want to guarantee the biggest refund. TurboTax’s Maximum Refund Guarantee promises to refund your fees if you find a better refund with a different service.
You’re a freelancer. TurboTax’s self-employed editions offers some of the most user-friendly and robust assistance specifically designed for freelancers and independent contractors.
You need a refund advance. Eligible customers get access to a larger advance at no added cost, compared with a smaller advance for an annual fee and interest charges at H&R Block.
TaxAct is best for you if…
You’re shopping for the lowest cost. TaxAct beats its competitors significantly on price at every tier and provides live assistance from a tax professional at no additional cost.
You’re concerned about accuracy. Every tax service comes with an accuracy guarantee, but TaxAct offers one of the highest reimbursement levels at $100,000.
6 Ways to Get Free Tax Filing & Prep Assistance
In addition to these top options for affordable online filing, you can find tons of free ways to file simple returns online for free.
1. IRS Free File
You can always file your federal taxes for free-free, if you’re eligible, through the IRS Free File portal. This service is available to filers who earned $72,000 or less (in 2020), and the page also links to free fillable forms for earners at all levels.
The IRS doesn’t directly provide this service, but it partners with 13 tax preparation companies — like H&R Block and Jackson Hewitt — to facilitate your process.
2. United Way MyFreeTaxes
If you made less than $66,000 in 2019*, take advantage of United Way’s MyFreeTaxes program to file federal and state taxes online for free.
The site notes that 100 million Americans qualify for this free filing option, powered by H&R Block.
*Information for tax year 2020 wasn’t available as of this writing, but we suspect it’ll continue to be in line with the IRS Free File requirement of $72,000.
If a 1040EZ is all you need to file, TaxSlayer will help you do it online for free. The Simply Free edition offers a deduction finder, and you can add your state returns at no charge.
Active duty military members can file a federal return for free, regardless of your tax situation.
EFile offers free basic federal filing and advises this option if you’re single or married and filing jointly with no dependents. You can get 50% off the state filing fee with the promo code “50eFile.com.”
5. Volunteer Income Tax Assistance Program (VITA)
Get help with basic tax prep from an IRS volunteer through the Volunteer Tax Assistance Program (VITA) and Tax Counseling for the Elderly (TCE) programs. VITA assistance is available to:
People who “generally make $57,000 or less” (for tax year 2020).
People with disabilities.
Limited English-speaking filers.
TCE assistance is available for filers over age 60, and volunteers specialize in questions about pensions and retirement-related issues.
All volunteers are certified by the IRS and many have professional backgrounds in accounting and finance.
6. Credit Karma Tax
Credit Karma provides free federal and state tax filing for the most common tax forms, including those for more complex tax situations, like business income (Schedule C) and itemizing deductions (Schedule A).
Plus, when you create an account to use Credit Karma Tax, you’ll also get access to Credit Karma’s other free services, including a look at your credit scores from TransUnion and Equifax, details from your credit reports and credit score monitoring.
Should You Do Your Own Taxes or Hire a Tax Pro?
So you can file your own taxes from the comfort of your home… but should you?
Rugg told us that some circumstances add new levels of tax considerations you might miss if you don’t bring in a professional eye.
“There are five situations where taxpayers should consider using a professional — when they get married, when they buy a home, when they have a child, when they have investments and/or when they are self-employed,” he said.
One of these events might trigger you to work with a tax pro every year after. Or you might just want to bring in help for the tax year when the change happens so you can get a better understanding of your situation, the forms you’ll need; and the deductions, credits and additional tax liabilities you should know about.
You probably don’t need to work with a tax expert if you’re a single W-2 employee with no dependents or property. You should be able to easily find free a tax software/platform, instead of paying for guidance from a real person or pricy software.
We hope with the best online tax preparation software at hand, April 15 doesn’t seem so ominous anymore.
Just don’t wait until April 14 to file your taxes, and you’ll be fine.
Dana Sitar (@danasitar) has been writing and editing since 2011, covering personal finance, careers and digital media.