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Estimating taxes as the first step in planning/budgeting

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  • Estimating taxes as the first step in planning/budgeting

    I'm still a resident, but I'm starting to look at employment offers for real jobs with post-residency salaries attached. We've kept a reasonable budget so far, but our Investor Policy Statement hasn't had to go much beyond putting some towards loans and Roth, so it's exciting to start to think about all the new three-letter (or number) accounts I'll be able to start using soon.

    But step 1 is figuring out how much money we'll even have to use once the IRS has taken its cut, and all the tax estimation calculators and rules of thumb or back of the envelope methods are extremely unsatisfying and sometimes even pretty far off once you get into higher incomes or have any special case applying that changes things.

    I know there's an excel 1040 out there that apparently works well, but it seems to be constructed very much as a black box that just does the calculations for you without adding any to understanding of what's affecting your taxes.

    I was just wondering if anyone had a system that helped them accurately estimate taxes and also allowed them to quickly evaluate different scenarios to see how different investing or allocation strategies affect tax liabilities.

    I studied engineering in undergrad, and we had some pretty big projects that we modeled entirely in excel, with interconnected values appropriately affecting results downstream, even to the point of exporting to and updating a CAD model of the project. My dream is to do something like this that connects our budget, taxes, and investing. I think it'll help with any sort of decision-making that has to be done, and by getting a tax model together, I think understanding whatever the current tax situation is will help with understanding how any changes really affect you.

  • #2
    Pretty tall order. You can find online calculators that project taxes and online calculators for inflation and online calculators for investment projections and online calculators for budgeting, etc. etc. but to include all of that along with debt payoff scenarios and modeling different variables that connect and update everything, you're probably going to have to use some kind of financial planning software. Ours costs about $10k/year (eMoney), but Money Guide Pro is as low as $995/yr. If you create something along these lines yourself, what you'll end up with is a financial planning program - maybe with your expertise and experience, you could even make it a viable product.

    Even most online tax prep software is not that good at modeling some of the specific variables that physicians have to deal with, at least beyond 1 year out. We usually borrow the CPA side's software capabilities when we have something beyond the basics as the financial planning software is just not that reliable for specific amounts.
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      the first question is what are you hoping to achieve? whats your margin of error?

      i use an excel spreadsheet i built. plug in my rough income, get it down to the taxable income, and then have all the brackets broken down and add them up.  even with some unexpected TLH last year, and forgetting dividends, i was only off about $500.

      in other words, it didnt matter. i know the rough percentage to withhold, what i am roughly expected to owe vs get as a refund.

       

      after that, the wife spends the rest (ha...joke).

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      • #4
        This frustrates me as well. Last year our withholding wasn't enough (yay marriage penalty!) and we owed like 8k... ouch. This year I increased withholding but we also moved into a new house with more mortgage interest to deduct. Oh, and started a taxable account so will have dividends from that. I have absolutely no idea what to expect with my return this year. For planning purposes, if you live like a resident your first few years out it won't matter much if your tax estimates are off, so you'll have time to see how things shake out before growing into your salary a little more

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        • #5
          Just assume 20-25% will go to taxes in your first full year as an attending. Adjust next year after you've calculated it out.

          But if you really want to have a go at it, just pull out a 1040 and do it by hand while making some simplifying assumptions. You'll learn a lot. I've done that so many times I can almost do it in my head.

          Let's play along:

          • What will your approximate household income be?

          • What's your state?

          • What's your family situation?

          • What are your major deductions?

          • What are your retirement account options?


          Just realize there's a big huge problem with what you're doing- the tax code will probably be different next year. None of us really know how much we'll be paying next year.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011

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          • #6
            Without having a year or two of income history and spending, as you are finding, it is very difficult to predict taxes, especially with an engineering level of precision.

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            • #7




              ...Ours costs about $10k/year (eMoney), but Money Guide Pro is as low as $995/yr. If you create something along these lines yourself, what you’ll end up with is a financial planning program – maybe with your expertise and experience, you could even make it a viable product...
              Click to expand...


              Thanks for the context, I wasn't aware of these products and it's definitely helpful to understand the commercial market and see what sort of things can be done and which of those things I might want to do as well. I guess the difference for me, what make it might be easier for me but also less viable as a product would be that I have no desire to make it something that looks neat or could work for anybody, just need it to work for me.







              Just assume 20-25% will go to taxes in your first full year as an attending. Adjust next year after you’ve calculated it out.

              But if you really want to have a go at it, just pull out a 1040 and do it by hand while making some simplifying assumptions. You’ll learn a lot. I’ve done that so many times I can almost do it in my head.

              Let’s play along:

              • What will your approximate household income be?

              • What’s your state?

              • What’s your family situation?

              • What are your major deductions?

              • What are your retirement account options?


              Just realize there’s a big huge problem with what you’re doing- the tax code will probably be different next year. None of us really know how much we’ll be paying next year.
              Click to expand...


              Thanks for chiming in, it's so cool how actively you help us all out. The 20-25% is just the federal portion right? I'm calculating 24.7% for that, and then when the SS, Medicare, additional Medicare, and state is factored in, I get an effective rate of 30.7%. That's married filed jointly on $300,000 gross salary in GA, with spouse and child. Major deductions (or maybe tax adjustments if they aren't technically deductions?) are $18,000 to 401(k), $6,750 to HSA, $20,000 in charitable donations, and I guess mortgage interest on the first payments of a ~$1200 monthly mortgage. W-2 employee, no special retirement accounts though I will be thinking about 529 soon. Not a big impact on taxes, but FYI ~$200,000 in debt which will be the focus until gone.

              I've done the 1040 a handful of times already just trying out some different assumptions, which was part of the motivation behind wanting to create a model. I understand as some people have pointed out that you can get close enough with some back of the envelope calculations, but I think this is just the way my mind works, and working on creating the model has already taught me so much.

              For those who base estimations on last year, how difficult is it to DIY taxes when there are more major changes in tax code than just bracket adjustments? Do you just have to start from square one?




              Without having a year or two of income history and spending, as you are finding, it is very difficult to predict taxes, especially with an engineering level of precision.
              Click to expand...


              Oh I have a good idea about what my spending will be, I'll be living like a resident for the first 3-5 years, right? ;-)

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              • #8
                You will have new choices about disability, insurance, investment opportunities that will affect your "spending "

                There will be charitable opportunities and emergency room visits with kids. Fees for schools and kid activities. Unexpected family needs.

                It's an exciting time! Congrats on getting a great start.

                Comment


                • #9




                  I’m still a resident, but I’m starting to look at employment offers for real jobs with post-residency salaries attached. We’ve kept a reasonable budget so far, but our Investor Policy Statement hasn’t had to go much beyond putting some towards loans and Roth, so it’s exciting to start to think about all the new three-letter (or number) accounts I’ll be able to start using soon.

                  But step 1 is figuring out how much money we’ll even have to use once the IRS has taken its cut, and all the tax estimation calculators and rules of thumb or back of the envelope methods are extremely unsatisfying and sometimes even pretty far off once you get into higher incomes or have any special case applying that changes things.

                  I know there’s an excel 1040 out there that apparently works well, but it seems to be constructed very much as a black box that just does the calculations for you without adding any to understanding of what’s affecting your taxes.

                  I was just wondering if anyone had a system that helped them accurately estimate taxes and also allowed them to quickly evaluate different scenarios to see how different investing or allocation strategies affect tax liabilities.

                  I studied engineering in undergrad, and we had some pretty big projects that we modeled entirely in excel, with interconnected values appropriately affecting results downstream, even to the point of exporting to and updating a CAD model of the project. My dream is to do something like this that connects our budget, taxes, and investing. I think it’ll help with any sort of decision-making that has to be done, and by getting a tax model together, I think understanding whatever the current tax situation is will help with understanding how any changes really affect you.
                  Click to expand...


                  I use excel, but not for how changes affect things complexly downstream. I have months, income tax, invest, bills, net, spend, and excess columns. I use my effective tax rate which of course you dont know at this time. If I make more the taxes go up, investments max out faster and there's more to decide what to do with.

                  Im not sure what a sophisticated model drawn off this base really does. If you make more money you have more to either invest, pay off debts, or spend. Not much complexity there. If its invested your goals come faster, paid off that goes away faster, spent you are doing/having more stuff instead.

                  Comment


                  • #10
                    I think this will get you in the ballpark, I used it to make my budget when I first started out.  I also would allow some money in my emergency fund if it underestimates it.

                    https://smartasset.com/taxes/income-taxes

                     

                     

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