Author Topic: How do you count tax in your budget?  (Read 3848 times)

StockBeard

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How do you count tax in your budget?
« on: June 01, 2015, 05:01:22 PM »
My wife and I are managing a simple spreadsheet with expenses and income.
Tax is always a confusing one for me.

Should I just remove taxes from the equation in our budget? Or is it counted as an expense? The problem with counting it as an expense is that it represents a massive percentage of our expenses nowadays, and achieving 75% saving rates is pretty much impossible if you factor taxes in, as they more or less represent 25% already.

How do you handle Tax in your house budget spreadsheets?

Retire-Canada

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Re: How do you count tax in your budget?
« Reply #1 on: June 01, 2015, 06:21:47 PM »
I don't count taxes in my budget. I have a pretty good handle on what my after tax income is.


Eric

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Re: How do you count tax in your budget?
« Reply #2 on: June 01, 2015, 06:53:14 PM »
Taxes are an expense that you'll have to account for once you quit.  You'll have to pay income and/or capital gains taxes, and that amount will have to be covered by your investments just like any other expense.

I like the Taxcaster as a pretty good estimation tool^.  Don't forget state taxes if applicable!


^ Although it's currently showing the amounts due as a "negative refund" for some reason, instead of amount owed.  Nice double negative!
« Last Edit: June 01, 2015, 06:54:46 PM by Eric »

forummm

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Re: How do you count tax in your budget?
« Reply #3 on: June 01, 2015, 06:57:07 PM »
I only count the taxes that I have some control over and will have to keep paying in FIRE. So I include property and sales taxes but not income taxes. There will be in some years some income tax that I will have to pay in FIRE, but that amount is difficult to know at this time, and will generally be very small (and zero frequently). So I'll pay more attention to that specifically when I get closer to pulling the RE trigger to make sure there's enough of a buffer for taxes given the amount I'm planning to spend and how much of that could be taxable.

RangerOne

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Re: How do you count tax in your budget?
« Reply #4 on: June 01, 2015, 07:06:06 PM »
The only reason to track taxes is to make sure you are paying enough and not overpaying yourself come years end. It doesn't really matter what you call it. Saving money relative to spending should only ever be calculated with take home pay annually after you have settled your true tax burden. Calculation that use monthly gross pay are just simplified to make blanket statements but really don't help you budget.

If you truly want to try to save 75% of your "pay", review all of your taxes at years end, and see how much money you save pre and post tax all together versus what you spent excluding taxes. Then you will see how close you came to saving 75%.

Just keep in mind you are short changing yourself if you are not taking full advantage of all your tax defer-able savings, since this gives you an opportunity to increase your yearly take home significantly.

MDM

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Re: How do you count tax in your budget?
« Reply #5 on: June 01, 2015, 07:46:55 PM »
The problem with counting it as an expense is that it represents a massive percentage of our expenses nowadays
Yes, and a good reason to ensure one understands the tax code well enough to minimize one's tax burden.

Quote
and achieving 75% saving rates is pretty much impossible if you factor taxes in, as they more or less represent 25% already.
Don't worry about saving relative to income: it is saving relative to spending that is important.  E.g., see http://forum.mrmoneymustache.com/welcome-to-the-forum/how-do-you-calculate-your-savings-rate-32699/

Quote
How do you handle Tax in your house budget spreadsheets?
This thread seems pertinent: http://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-manage-cash-flow-if-you-don%27t-use-a-budget/

StockBeard

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Re: How do you count tax in your budget?
« Reply #6 on: June 01, 2015, 07:59:05 PM »
Thanks everyone!

Just keep in mind you are short changing yourself if you are not taking full advantage of all your tax defer-able savings, since this gives you an opportunity to increase your yearly take home significantly.
This is good advice in general, but I'm in a situation where tax deferred accounts are not necessarily a good deal for me. Specifically, I tend to move a lot geographically. I'm currently in the US, but if I were to leave (which is a very likely scenario), I'd for example have to cash-out my 401k early, which means a 10% penalty in addition to taxes (If I understand correctly).

Gin1984

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Re: How do you count tax in your budget?
« Reply #7 on: June 01, 2015, 08:03:44 PM »
Thanks everyone!

Just keep in mind you are short changing yourself if you are not taking full advantage of all your tax defer-able savings, since this gives you an opportunity to increase your yearly take home significantly.
This is good advice in general, but I'm in a situation where tax deferred accounts are not necessarily a good deal for me. Specifically, I tend to move a lot geographically. I'm currently in the US, but if I were to leave (which is a very likely scenario), I'd for example have to cash-out my 401k early, which means a 10% penalty in addition to taxes (If I understand correctly).
Are you a us citizen?  If so, no you do not need to cash it out.

StockBeard

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Re: How do you count tax in your budget?
« Reply #8 on: June 01, 2015, 08:05:58 PM »
Nope, I am not a US citizen.
I think it is also ok for not US citizens to keep a 401k even when they leave the country, but this leads to lots of tax implication depending on where they end up living next. I decided that this is not worth the headache at this point :)

Zikoris

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Re: How do you count tax in your budget?
« Reply #9 on: June 01, 2015, 08:45:52 PM »
I don't - I budget strictly after tax. Canada is fairly kind as far as taxing investment income goes, and I keep as much as I can in tax-sheltered accounts.

Roots&Wings

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Re: How do you count tax in your budget?
« Reply #10 on: June 02, 2015, 06:13:53 AM »
I have a budget item for the estimated taxes I have to pay for investment capital gains/dividends/interest, which is creeping up as the stash grows. I don't include the income taxes my employer withholds.

mlipps

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Re: How do you count tax in your budget?
« Reply #11 on: June 02, 2015, 06:23:34 AM »
I don't mess with them in my monthly budget in YNAB but I update an excel spreadsheet every February that tracks our exact salary for the prior year, taxes paid, money saved in the 401k and IRA, money saved in cash, and money spent for the year in each category. I like seeing the year to year comparison this way.