My Personal Finance Journey

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My name is Jacob, a husband to a wine-blogger wife, father to two bouncy-boy toddlers, and I'm the owner/author of My Personal Finance Journey. By day, I am a scientist working in bio-pharmaceutical development. Personal finance has been my hobby since 2007 when I started teaching myself through books (that finance B.S. degree didn't teach me much!). Learning how to save, adopt a frugal mindset, and invest my own money soundly has allowed me to have a savings rate > 50%, increase my net worth by > 20 times, grow my career, and always do what I love. Check out the About Me page to learn more!

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A Review of My 2012 Income Tax Results and 2013 Tax Planning

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This past week, I finally received my completed 2012 federal and state income tax return documents from the accountant.

In general, the results were very good. However, I feel that by analyzing some of the finer details/numbers, I can better plan for how to approach my tax planning for the 2013 year.

Specifically, the questions I am interesting in answering are as follows:

  • How much of my un-taxed income should I be saving each month in order to pay taxes when the time comes?
  • Should I use an accountant for filing my 2013 taxes next year?

Let’s get started! 

2012 Income Breakdown

My 2012 gross income can be broken down in to the following components:
  • 2.3% from dividends and interest from investments (meaning that I can likely ignore this contribution for planning purposes since it is so small).
  • 68% from untaxed fellowship income for my work as a graduate student. 
  • 29.7% from Schedule C self-employed business income.

After subtracting out the deductible part of self-employment taxes and my contributions to my Individual/Self-Employed 401k account, I arrived at an Adjusted Gross Income (AGI) that was 20% lower than my overall gross income, so that was nice! 

2012 Deductions

Since the standard deduction was greater than my itemized deductions, I took the standard deduction of $5,950 for 2012. After subtracting the 1 personal exemption I get for myself (with no kids, filing as a single person), I arrived at a taxable income that was only 57.4% of my original gross income that I started with (so a ~23% reduction from the AGI above).



2012 Federal Taxes

Having established my taxable income, my total personal federal taxes were computed. Next, self-employment taxes were added on top of the personal taxes. 
This resulted in my total taxes owed for 2012 being ~11% of my overall gross income. Nice! I am surprised this percentage is so low! 
If we calculate this based on my AGI or taxable income, the percentages become 13.9% and 19.2%, respectively.

2012 State Taxes

For my Virginia State Income Taxes, the form starts out with my federal AGI mentioned above. From there, the VA standard deduction and my personal exemption reduces my taxable income to 71% of my overall gross income.
Having obtained my VA taxable income, my 2012 total state taxes owed was calculated to be 3.5% of my overall gross income. If we calculate this based on my federal AGI or federal taxable income, the percentages become 4.4% and 6.1%, respectively.

2012 Total (State + Federal) Taxes

If we put everything together from both state and federal taxes, we can find something useful for planning purposes going forward:
  • I paid a total tax amount for 2012 equal to 14.6% of my overall gross income.
  • For 2011, I calculated this number to be 17.8%.

2013 Estimated Tax Payment Schedule

One of the nice things that my accountant does do for me each year is to calculate/prepare my estimated taxes for the following tax year (so 2013 was prepared during the 2012 tax preparation round).
For both the Virginia and federal estimated taxes for 2013, the accountant scheduled my payments to be ~$20 more than the total tax I owed for the 2012 (I’m not sure why they made it be $20 more and not just 100% of the tax amount from the previous year).

Target Question # 1 – How much of my un-taxed income should I be saving each month in order to pay taxes when the time comes?

For 2013 tax planning purposes, the important question I have at this point is what percentage of my un-taxed fellowship and un-taxed self-employment income should I be saving to pay the tax man this next year? 
On one hand, I do have the requirement that I need to pay the scheduled estimated taxes set forth by the accountant, primarily based on my 2012 tax amounts. This part I really can’t change. 
At first glance, I was guessing that since I am paying $700-$800 per month for staff writers to help build some awesome content for the site, my overall 2013 gross income will be lower than in 2012. By the same token, I have something else counter-acting this decrease in income by the fact that I won’t be contributing pre-tax dollars to my self-employed 401k this year since I set up a Roth 401k option (since my current tax level is so low, it makes more sense to pay the taxes now instead of on the withdrawal side). This could cause my taxes owed for 2013 to be about the same as 2012.
One problem that occurred with my saving method for 2012 taxes was that I was saving 33% of my total un-taxed. As we discussed below, in reality, it ended up that I only paid ~15% of my gross income in taxes. In other words, I had saved about 2x the amount of cash that I needed to save in 2012 for my taxes! 
Now, I’ll admit that having saved some extra cash throughout the year isn’t the most terrible thing to have happened to me ever. In fact, I am glad now to have it since 1) I used some of it to pay my 1Q and 2Q 2013 estimated taxes, 2) I used it to purchase my fiance’s engagement ring, and  3) I set aside another portion of it to help pay for things for our wedding coming up in 2014. 
However, it is likely that if I had known that I only needed 1/2 of the cash that I was stashing away, I could have put that money to better use by investing it at a higher rate than the 0.55-0.75% it was earning in my online savings accounts.
In order to optimize this for 2013, I think that I will approach the tax savings process as follows:
  • To be conservative, I will save 20% (so slightly higher than the 15% and 18% taxes I paid in 2012 and 2011, respectively but lower than the 33% I was saving for last year) of my un-taxed gross income each month in order to pay taxes/estimated taxes for 2013.



Target Question # 2 – Should I use an accountant for filing my 2013 taxes next year?

With my first 2013 tax planning question answered in the previous section, my attention now turns to whether or not I should use an accountant to help with preparing my tax return this coming year. 
As I mentioned in my post several days ago discussing my experiences doing my 2012 taxes 4 times using Tax Act, TurboTax, H&R Block, and through an accountant, I calculated that I would have made/saved $151 after fees and tax refunds by using Tax Act for my tax return instead of an accountant.

This got me thinking – does an accountant provide me with enough value to keep using the same one (or different) going forward?

Well, let’s start by first addressing the easy question of using the same accountant going forward. For the past few years, I have been using an accountant 1300 miles away back home in Arkansas because they were tying the payment for my taxes in with my Dad’s business tax return (essentially doing my tax return without much additional compensation). Since my Dad is no longer having business taxes done since he has switched to regular employee income, I have to now pay to use that accountant. Obviously, there is no reason for me to stay with that same accountant since they are 1) charging me and 2) so far away.

So, the question now becomes – do I find a local accountant here in Virginia or just do my taxes myself using Tax Act?

Since I have self-employed income/a home business, my taxes tend to be rather complicated. In addition to standard estimated taxes that I pay periodically, I seem to often have tax-related questions that come up throughout the year as I am reading about various issues related to personal finances. In my mind, it is rather valuable to have a certified tax professional that I can openly ask about these issues. In addition, using an accountant to do my taxes provides me with a certain amount of peace of mind that is hard to put an exact price on. However, the number is definitely higher than the cost of the $151 from the 2012 tax return.

Because of the two considerations discussed in the paragraph above, I will likely start seeking out a local accountant here in Virginia to help with my 2013 taxes based on recommendations of several people I know here in the community. I’ll be sure to share my experiences of screening CPA’s as I go through the process, but I will need to do this sooner rather than later since I will likely need to mail 1099-MISC’s to my staff writers from this site prior to January 31st, 2014 so that they can file their 2013 tax returns on time and I can avoid penalties.

How about you all? What lessons did you learn from your 2012 taxes that you will carry forward in the next year? 

Have you ever calculated what % of your gross income you pay in state + federal taxes (this is the first time I have ever calculated a percentage)?

 Share your experiences by commenting below!

    ***Photo courtesy of http://farm4.staticflickr.com/3067/2592570286_b213acd1de_z.jpg?zz=1

    About the Author Jacob A Irwin

    Hi folks! My name is Jacob. I am the owner and operator of My Personal Finance Journey. I started this blog in January of 2010 and have enjoyed the journey ever since. Since finishing up graduate school in Virginia in 2014, I have been working in biopharmaceutical development in Colorado. You can read more about me and this site here​. Please contact me if you have any questions!

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  • myfijourney says:
    March 28, 2013 at 1:17 pm

    I'm going to shop around for some accountants later this year. As my investment income becomes larger, I think it will be easier to start outsourcing some of this tax stuff. Especially since TurboTax premium (which I need to enter options income) is so bloody expensive anyway.
    My recent post Recent Transactions – Lots of Stuff

    Reply
    • MyPerFinJourney says:
      March 28, 2013 at 10:22 pm

      Thanks for reading myfijourney! Any ideas on how you're going to screen CPA's? Going by referral from people you know, etc?
      My recent post A Review of My 2012 Income Tax Results and 2013 Tax Planning

      Reply
      • myfijourney says:
        March 28, 2013 at 11:31 pm

        Honestly, I have no idea. I haven't lived here long enough to have any kind of a network of friends to tap into. So I'll probably just find someone close to me and ask about rates. Maybe look for some reviews online.
        My recent post Recent Transactions – Lots of Stuff

        Reply
  • Carrie says:
    March 28, 2013 at 4:43 pm

    I didn’t know it was legal to save money to pay for taxes at the end of the year? Hmm, that’s something that I should actually think about, lol. I was unclear of this because all of your money has to be taxed, correct?

    I actually enrolled into my bachelor’s degree for business administration so I could learn more about business in general and possibly become my own accountant… Yeah right. Accounting is not up my alley.

    Reply
    • MyPerFinJourney says:
      March 28, 2013 at 10:21 pm

      Thanks for reading Carrie! So, it actually isn't legal exactly the way you're describing it.

      When it comes to paying taxes, you have two choices – have your employer withhold the taxes each paycheck or if you don't have taxes withheld automatically throughout the year (like me because of the nature of my income sources), save money yourself and then pay monthly or quarterly estimated taxes.

      If you don't pay your taxes frequently throughout the year, you will be charged a penalty (I believe 10% of the amount underpaid), so it isn't something you want to be too aggressive on.

      My recent post A Review of My 2012 Income Tax Results and 2013 Tax Planning

      Reply

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