Money Management

In a nutshell, you don’t have to worry so much. 

At this point, many people are busy finalizing their taxes. That means now is definitely the time to make sure you have all of the right documents you need to get your return done, from your mortgage interest statement to your various 1099 forms.

Completing your tax return is definitely something to feel good about. But even once you submit that return, your head may not be clear of tax-related worries. That’s because there’s always the lurking possibility of having the IRS audit your taxes.

Mark Steber, Chief Tax Information Officer at Jackson Hewitt, says that statistically speaking, the IRS audits very few tax returns each year. So your chances of the IRS needing to take a closer look at your return are pretty low to begin with.

That said, there are a few things you can do to avoid an audit. And those same moves will help you get through one if your return happens to get picked.

1. Report all income

Hiding income from the IRS is unlikely to work out well for you. So gather up those 1099 forms and include that income on your taxes, whether it’s wages from a side hustle or interest your bank paid you. If you’re honest, says Steber, and you report everything, then the IRS may not have a reason to dig further.

2. Make sure you’re claiming the right deductions

You may be eager to take advantage of all of the tax benefits you can. But claiming a deduction you aren’t entitled to could increase your chances of ending up on the IRS audit list.

One tax deduction that lends to a lot of confusion, says Steber, is the home office deduction. He explains that this deduction is only available to tax-filers with self-employment income, so if you don’t have any, you can’t claim a home office. But if you claim a home office when you’re not supposed to, the IRS is likely to push back.

3. Have great documentation

If you’re self-employed, there are many different expenses you may be eligible to deduct on your tax return, from office supplies to travel costs to professional licenses. But if you’re going to claim a deduction for these things, make sure you have documentation to back your claim up.

Maybe you invested in a lot of business equipment this year and have claimed a $9,000 deduction. If you have receipts totaling $9,000, there’s really no issue.

To be clear, having documents won’t necessarily mean the IRS won’t look to audit your tax return. But in that case, says Steber, “If you’ve done your tax return accurately and you have good documentation, an audit is nothing more than someone asking to see some support.”

Don’t lose sleep over an audit

The idea of having a tax return audited may be daunting. But remember, in many cases, an audit is simply a way for the IRS to make sure your taxes are correct. And if they are, indeed, correct, there’s really nothing to worry about.

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Falling for it could hurt your finances over the long term. 

If you’ve shopped online or in person lately, you may notice that a growing number of companies are offering a new option to make your purchase. It’s called Buy Now, Pay Later (BNPL).

Buy Now, Pay Later has been around in some form for a long time, with businesses like furniture stores offering the chance to take your furniture home today and pay for it over time (sometimes with no interest or low interest loans). But it’s become much more widespread recently, even for smaller online purchases.

Before you opt for a BNPL arrangement, though, you may want to consider this warning from finance expert Suze Orman about this “too-tempting gimmick.”

Suze Orman on Buy Now, Pay Later

Orman recently urged her readers to “stop before agreeing to any buy-now-pay-later offer,” because she believes this payment method “gets you to buy something you can’t really afford, or kid yourself that it’s not really that expensive.”

Unfortunately, one of the biggest risks of BNPL is that it does make purchases seem more affordable than they are, since you end up only looking at whether the monthly payment will fit into your budget rather than looking at the big picture. And when you break things down into small chunks, it seems more manageable to pay for them. For instance, if you can pay $10 per month for a $100 item, you may think that sounds cheap and easy to afford — but you forget about that fact you’ll be committing future income to a purchase that’s long in the past. You may also be making that purchase more expensive thanks to interest charges.

Rather than falling victim to this gimmick, Orman said you should ask yourself two key questions. First, you should ask yourself whether you’d be able to afford the purchase “without it becoming unpaid credit card debt.” Second, you should ask yourself, “If I had to pay 100% of the cost right now, rather than just 25%, would I still buy it?”

Is Orman right?

Orman’s advice about steering clear of Buy Now, Pay Later is spot on. The last thing you want to do is make it harder to live within your means in the future by taking on a bunch of debts for different purchases you make with BNPL. You’ll soon find yourself with little money left in your bank account if you’re committing your future self to make payments for weeks, months, or years into the future.

You also don’t want to be tricked into making an impulse purchase or buying something that isn’t a true necessity on credit just because the seller makes it look affordable with a “low monthly payment” offer. It doesn’t matter whether something fits into your monthly budget — it matters whether it fits into your big financial picture.

Ultimately, unless you are buying something you really, absolutely, truly need at the current moment, you should try to save up for it rather than financing it — even if Buy Now, Pay Later makes the financing route seem effortless. Often, that’s really not the case at all.

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It may be time to get serious about paying your debt off. 

Rampant inflation has been with us for a long time now, and the problem is not close to being over. Case in point: February’s annual Consumer Price Index reading was 6%. But the Federal Reserve, as a matter of policy, likes to keep inflation at around the 2% mark. The central bank believes this level of inflation lends to a stable economy and consumer confidence.

Meanwhile, to combat inflation, the Fed has been hiking up interest rates since early 2022. And on March 22, the Fed moved forward with its second 0.25% interest rate hike this year.

That move wasn’t unexpected at all. The central bank had been warning that it would need to keep raising interest rates to fight inflation. But if you’re a credit card borrower, you should know that this latest rate hike might impact you in a negative way.

Your payments could get more expensive

The Federal Reserve doesn’t set consumer interest rates. Rather, it sets the federal funds rate, which is what banks charge each to borrow on a short-term basis.

But when the Fed raises its benchmark interest rate, the cost of borrowing tends to rise for consumers across the board. And from there, everything from auto loans to personal loans to home equity loans tends to become more expensive.

Meanwhile, rate hikes can be pretty detrimental for borrowers with variable interest debt, like those who are carrying balances on their credit cards. When you’re not borrowing at a fixed rate, the interest rate on your debt can rise, making it more expensive. And that’s the situation credit card borrowers face today. If you’re barely making your minimum payments every month, an increase in your interest rate could make it so you’re not even able to submit those in a timely manner. That could result in extensive credit score damage.

Aim to whittle down your debt sooner rather than later

If you’ve been carrying credit card debt for quite some time, your best protection against further interest rate hikes is to pay off your balances as quickly as possible. And you may want to turn to the gig economy to make that happen.

It’s easy to see how your regular paycheck alone may not make it possible to get out of debt. But if you’re able to boost your income with a second job, you can allocate those earnings to your credit card balances.

At the same time, if you’re trying to pay off credit card debt, make every effort to not rack up more debt along the way. Don’t swipe your credit cards unless it’s an emergency, and budget carefully so you’re able to cover your monthly expenses. Also, try cutting back on expenses that aren’t essential, like streaming services and subscriptions.

The Fed still has a ways to go in its fight to cool inflation. But as a credit card borrower, that puts you in a pretty rough spot. So do your best to pay down that debt — before it gets all the more costly.

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They’re still not perfect, but they’ve definitely improved. 

Most Americans have a bank account of some kind. According to the Federal Reserve report “Economic Well-Being of U.S. Households in 2021,” only 6% of Americans lack one. But the banks and banking in this country have come a long way, particularly over the last century or so, since we’ve been operating under our current banking system.

Thankfully, many of the changes made over time have resulted in more equality, convenience, and lower costs for ordinary Americans. Here are a few ways banks have gotten better, as well as what these changes mean for you as a bank account holder.

1. The creation of the Federal Reserve

The start of our modern banking system was with the establishment of the Federal Reserve. President Woodrow Wilson signed the Federal Reserve Act into law on Dec. 23, 1913. The Federal Reserve (or “the Fed,” as it’s also known) is responsible for ensuring the safety of the American banking and financial system by influencing money and credit policies.

The Fed regulates and supervises banks and other financial institutions, and also provides financial services to the U.S. government and foreign institutions. Banking in the U.S. operated quite differently prior to the creation of the Fed, and it was a lot less stable. Panics, bank runs, and bank failures used to be a lot more common.

How does this help you?

We often refer to the Fed in the context of setting Federal Reserve interest rates, which do not directly equal consumer borrowing rates (although the two are linked). But it may surprise you to know that the Fed protects you in lending and deposit transactions. Let’s say you want to take out a mortgage loan to buy a home. Fed examiners ensure that you’re informed of the interest rate you’ll be paying and that you’re not being extended a loan you can’t afford to pay back. The Fed also regulates debit card transactions, making sure they’re conducted fairly and with appropriate fees.

2. Establishment of the FDIC

The Federal Deposit Insurance Corporation was established during the Great Depression, as part of the Banking Act of 1933. The FDIC’s goal is to maintain stability and public confidence in U.S. banking and finance. It does this through deposit insurance, regulation of financial institutions, and acting as the receiver for failed banks.

How does this help you?

The FDIC has been in the news a lot lately, thanks to the failure of Silicon Valley Bank. A lot of ordinary people have been wondering what would happen to their money if their bank collapsed. The FDIC insures bank deposits for up to $250,000 per account holder, so if you have a deposit account (checking, savings, CD, or money market account) with a balance of less than that, your money will be returned to you in full if your bank fails. You can check the BankFind tool to see if your bank is on it.

3. Greater equality in banking

As the 20th century wore on, the financial system became more equitable, with more and more Americans getting access to bank accounts, loans, credit cards, and more. While women started to be able to open bank accounts of their own in the 1960s, more work was needed to ensure equality in banking. A hallmark piece of legislation involved in this process was the Equal Credit Opportunity Act, which was signed into law in 1974. This law, which applies to banks and lenders of all kinds, ensures that those seeking to borrow money can’t be discriminated against on the basis of race, religion, sex, marital status, age, and more.

How does this help you?

Everyone should be able to do business with banks without fear of being turned down due to circumstances beyond their control, like their sex or race. You have the ability to open your own bank account, open a credit card account, borrow money, and otherwise use the financial system thanks to steps toward greater equality in banking.

4. The rise of online banking

If you were born after the internet revolutionized life as we know it, online banking may not seem like such a big deal to you. I remember visiting the bank with my parents as a young kid, and back then, there was no option to check your account balance on your computer or smartphone app (in fact, smartphones didn’t yet exist). You also couldn’t deposit a check by taking a photo of it, and would need to visit the bank in person, during business hours, to hand that check (and a deposit slip) off to a teller.

According to FinTech Magazine, in 1994, Stanford Federal Credit Union was the first bank in North America to offer internet banking to its customers. Banks today likely couldn’t expect to stay in business for long without offering online services. And some banks are now entirely online, without branches or in-person transactions of any kind. According to Statista data, 65.3% of Americans used digital banking in 2022. (I’m surprised that number isn’t higher, honestly.)

How does this help you?

As banking technology evolves and increasingly moves online, the benefits to you are immeasurable. Online-only banks have become known for offering higher APYs on savings accounts, CDs, and money market accounts, and usually without fees to boot. Mobile banking apps are incredibly convenient and let you have a look at your account balance, send money to a friend, deposit a check, or transfer cash with just a few taps, anywhere, and at any time. No more turning up at the bank to find it closed, or waiting on hold with customer service.

5. Bank fees are being phased out

A more recent development in the history of banking has been the decline of bank fees. These have historically included account maintenance fees, fees to use out-of-network ATMs, and overdraft fees, and they’ve been a real drag for consumers. After all, if you’ve overdrafted your bank account, the last thing you need is to end up even deeper in the hole thanks to being assessed a $35 fee by your bank.

Online-only banks generally have no or lower fees than traditional banks because they have fewer overhead costs (the same reason they can offer higher APYs). But some major traditional banks are also lowering or canceling fees altogether, which is a welcome development. After all, why should we have to pay to keep our money in a bank?

How does this help you?

The phasing out of bank fees saves you money, plain and simple. Life can be busy, and if you forget to check the minimum balance requirements on your bank account and get assessed fees for dropping below the limit, you might end up kicking yourself for it. If your bank account has no fees at all, there’s no reason to worry.

Everyone has a story about how their bank could do better in one area or another. But banks have definitely improved over the last century, becoming more consumer-friendly and easier to do business with. That’s certainly worth celebrating.

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Image source: Getty Images
What happenedOn March 22, the Federal Reserve raised its benchmark interest rate by 0.25%. It’s the second 0.25% rate hike to come from the Fed this year as the central bank works to bring inflation levels down.So whatInflation has been surging since the latter part of 2021, and it’s been putting a huge strain on consumers. In February, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods and services, rose 6% on an annual basis. But the Fed has long stood firm in its belief that 2% annual inflation is the optimal level for a healthy economy. As such, the central bank is continuing to raise interest rates until CPI readings get closer to that mark.Of course, the decision to raise rates wasn’t an easy one this time around given the recent banking industry meltdown. But ultimately, the Fed felt it needed to move forward with another rate hike to make progress on the inflation front.”The Fed’s in a bit of a bind,” former New York Fed President Bill Dudley told CNN. “On the one hand, they should keep tightening because inflation is still too high and the labor market is too tight. On the other hand, they want to make sure they don’t do anything to exacerbate the stress on the banking system,” he said. “There’s not really a right solution.”Now whatThe Fed’s most recent rate hike represents its ninth straight increase, and the decision to raise rates by 0.25% should not come as a huge surprise. But still, consumers are apt to feel the strain of rate hikes.The Fed doesn’t set consumer borrowing rates directly. Those are determined by individual lenders. Rather, the Fed controls the federal funds rate, which is what banks charge each for short-term borrowing.But an increase in the federal funds rate commonly leads to costlier borrowing costs across the board, from auto loans to home equity loans to personal loans. Consumers with variable interest debt, such as those carrying credit card or HELOC balances, are likely to also see their costs rise. And given that the Fed isn’t done fighting inflation, consumers who don’t need to borrow in 2023 may want to err on the side of waiting.Now the one silver lining in all of this is that Fed rate hikes tend to lead to more generous interest rates across banking products like savings accounts and certificates of deposit (CDs). So consumers with spare cash can benefit from today’s higher interest rate environment. It’s those who need to borrow money or are already in debt who need to be extra cautious.Alert: highest cash back card we’ve seen now has 0% intro APR until 2024If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee. In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes. Read our free reviewWe’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy. 

What happened

On March 22, the Federal Reserve raised its benchmark interest rate by 0.25%. It’s the second 0.25% rate hike to come from the Fed this year as the central bank works to bring inflation levels down.

So what

Inflation has been surging since the latter part of 2021, and it’s been putting a huge strain on consumers. In February, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods and services, rose 6% on an annual basis. But the Fed has long stood firm in its belief that 2% annual inflation is the optimal level for a healthy economy. As such, the central bank is continuing to raise interest rates until CPI readings get closer to that mark.

Of course, the decision to raise rates wasn’t an easy one this time around given the recent banking industry meltdown. But ultimately, the Fed felt it needed to move forward with another rate hike to make progress on the inflation front.

“The Fed’s in a bit of a bind,” former New York Fed President Bill Dudley told CNN. “On the one hand, they should keep tightening because inflation is still too high and the labor market is too tight. On the other hand, they want to make sure they don’t do anything to exacerbate the stress on the banking system,” he said. “There’s not really a right solution.”

Now what

The Fed’s most recent rate hike represents its ninth straight increase, and the decision to raise rates by 0.25% should not come as a huge surprise. But still, consumers are apt to feel the strain of rate hikes.

The Fed doesn’t set consumer borrowing rates directly. Those are determined by individual lenders. Rather, the Fed controls the federal funds rate, which is what banks charge each for short-term borrowing.

But an increase in the federal funds rate commonly leads to costlier borrowing costs across the board, from auto loans to home equity loans to personal loans. Consumers with variable interest debt, such as those carrying credit card or HELOC balances, are likely to also see their costs rise. And given that the Fed isn’t done fighting inflation, consumers who don’t need to borrow in 2023 may want to err on the side of waiting.

Now the one silver lining in all of this is that Fed rate hikes tend to lead to more generous interest rates across banking products like savings accounts and certificates of deposit (CDs). So consumers with spare cash can benefit from today’s higher interest rate environment. It’s those who need to borrow money or are already in debt who need to be extra cautious.

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You can snag a tax break for medical expenses — but there are rules you’ll need to follow. 

Medical bills are a major expense a lot of people have to bear. In fact, a big contributor to U.S. credit card debt is none other than medical bills.

If you spent a lot of money on medical expenses last year, you may be wondering whether it will serve as a tax break for you. The answer is that it depends on how you do your taxes and how much your bills amounted to relative to your income.

Are you itemizing on your return?

Tax filers can go one of two routes when filing their returns: They can take the standard deduction, or they can itemize their personal deductions to see if that number is higher. In order to claim a medical expense deduction on your taxes, you must be itemizing on your return.

How much did you spend?

The rule for claiming a medical expense deduction is that you can only write off healthcare costs that exceed 7.5% of your adjusted gross income. And that’s where things get a little complicated.

Let’s say your adjusted gross income for 2022 was $70,000, and you spent $5,000 on medical bills last year. Clearly, that means your healthcare costs ate up a sizable chunk of your income. But if your adjusted gross income last year was $70,000, $5,000 is only about 7.1% of that. So in this situation, you get no deduction.

Now, let’s say that instead of spending $5,000 on medical bills in 2022, you spent $8,000. That’s over 11% of your income, so you should be good to claim a deduction if you’re itemizing on your tax return.

However, you don’t get to claim an $8,000 deduction. You can only claim amounts beyond 7.5% of your income.

Since 7.5% of $70,000 is $5,250, it means your first $5,250 in medical expenses cannot be deducted. You can only claim expenses above that threshold. So in this example, with $8,000 in medical spending, you’re looking at a deduction worth $2,750.

What expenses can you claim?

There tends to be confusion about the medical expense deduction because you might assume it only applies to doctor visits. Not so. You can claim expenses that extend to dental care if you had a lot of bills to cover out of pocket. You may also, in some cases, be eligible to claim transportation expenses as part of the medical expense deduction.

Say you needed treatment at a facility 40 miles away from your house multiple times last year. You can generally claim expenses like mileage, tolls, and applicable parking fees as part of your total medical expense deduction.

Know the rules

If you spent a lot of money on healthcare bills last year, then it absolutely pays to see if you’re entitled to claim a medical expense deduction. But claiming an incorrect deduction on your tax return could lead to an IRS audit, and that’s probably not something you want. Make sure you understand the rules fully so you don’t claim the wrong amount and subject yourself to further scrutiny from the IRS.

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