A Review of My 2013 Income Tax Results and 2014 Tax Planning

This past week, I received my completed 2013 federal and state income tax return documents from the accountant. After making one correction due to some confusion on whether my Solo 401k contributions were deductible or not, my taxes were successfully e-filed a few days later.

In general, the results were very good, as I felt like I leveraged the tax code to the best of my ability in order to maximize wealth. As has become my habit over the past few years, I feel that by analyzing some of the finer details/numbers, I can better plan for how to approach my tax planning for the 2014 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?
  • What would I predict my marginal tax bracket will be in 2014?

Let’s get started! 

 

2013 Income Breakdown

My 2013 gross income can be broken down in to the following components:

  • 3% from dividends, capital gains, and interest from investments (meaning that I can likely ignore this contribution for planning purposes since it is so small).
  • 71% from untaxed fellowship/wage income for my work as a graduate student.
  • 26% from Schedule C self-employed business income.
After subtracting out the deductible part of self-employment taxes, I arrived at an Adjusted Gross Income (AGI) that was ~2% lower than my overall gross income, so pretty much no change there.

 

2013 Deductions

Since the standard deduction was greater than my itemized deductions, I took the standard deduction of $6,100 for 2013.

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 77% of my original gross income that I started with.

 

2013 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 Federal taxes owed for 2013 being ~14% 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 14% and 18%, respectively.

 

2013 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 90% of my overall gross income.

Having obtained my VA taxable income, my 2013 total state taxes owed was calculated to be 5% of my overall gross income. If we calculate this based on my federal AGI or federal taxable income, the percentages become 5% and 6%, respectively.

 

2013 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 2013 equal to 19% of my overall gross income.
  • My marginal tax bracket was 15%.

 

2014 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 2014 was prepared during the 2013 tax preparation round).

For both the Virginia and federal estimated taxes for 2013, the accountant scheduled my payments to be approximately equal to the total tax I owed for the 2013 (only differ by some small rounding amounts used).

 

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 2014 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 2013 tax amounts. This part I really can’t change.

On the other hand, I am guessing that my overall UN-TAXED income will be lower in 2014 compared to 2013. While I predict that my un-taxed self-employment income will be roughly the same, my un-taxed fellowship income in 2014 will be 2/3 what it was in 2013 since I will be finishing my PhD by August. After which time, if I can hopefully find a job, I will transition in to being paid as an employee, where taxes are taken out of my paycheck ahead of time.  What this means is that by paying my estimated taxes per the scheduled amounts set by my 2013 taxes, I will likely be overpaying them this year. Of course, when I do start working as an employee, I could definitely crank up my exemptions so that my employer withholds less taxes each paycheck.

So, where does this all leave me?

Overall, I think the best course of action is to continue saving money to pay taxes based on the un-taxed gross income I realize/track on a month-to-month basis. The amount that I will save for taxes will continue to be 20%, based on my 2013 total tax owed being ~19-20% of my gross income. This will help me most accurately match my real taxes that I will owe overall for the year. 

 

Target Question # 2 – What would I predict my marginal tax bracket will be in 2014?

Another very important and related topic is trying to make a prediction for how my tax bracket will change, if at all, assuming that I can successfully obtain employment in the last 3rd of this year.

If I utilize my 2013 tax return gross income amounts as a starting point, only add up my fellowship income for 2/3 of the year, and add in an approximate amount I will make in my new job the last 3 months of the year (assuming starting in October 2014), there is really no chance for me to make it in to the 15% tax bracket if I assume I will file individually.

However, since I’m getting married later this year, I will be able to file my 2014 tax return jointly with my fiance. Adding her income for 2013 on top of mine and then subtracting out the generous filing jointly standard deduction and 2 personal exemptions (1 for each of us), I predict that we will have no trouble getting in to the 15% marginal tax bracket for 2014.

This is good news, as it means 1) full steam ahead contributing to my Individual Roth 401k, and 2) saving 20% of my un-taxed income is still an appropriate amount to be saving. 

If you’re interested in seeing the 2014 tax brackets, standard deductions, and personal exemption levels, I would recommend taking a look at the following article on Forbes.com.

How about you all? What lessons did you learn from your 2013 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?

Share your experiences by commenting below!

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