Tax Planning Software For Individuals – I’m happy to share a tax planning tool I discovered a year ago. I’m not one to over-promise or under-deliver and this, updated for the 2021 tax legislation, is nothing short of amazing.
I had previously spent hours and hours creating my own spreadsheet to better estimate my tax liability to see how some of the many customizations available to me would affect various aspects of my next tax return, including:
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Some things I could do towards the end of the year that would impact the above are:
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If you’ve never tried it yourself, I’m here to tell you it’s complicated. One change affects multiple calculations, and what seems like a good idea can be a very bad one, and vice versa.
One wrong move can easily cost you thousands of dollars in lost tax credits or deductions. Some deductions are based on taxable income, others are based on adjusted gross income (or modified adjusted income). In some cases, certain types of income are added back, such as dividends earned, which are deducted from your taxable income when calculating the QBI deduction.
There are other tax credits and income limits that may not be important to me now but may be important to you (or me in the future), such as:
I realized that even if I left out everything that doesn’t apply to me and my tax situation, a single Excel sheet cannot represent all of this.
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I stopped working on my spreadsheet when I was in the “better than nothing” phase when I realized I didn’t have the skills to integrate all the details of the monstrosity that is the US tax code. To be honest I wasn’t sure if it was possible.
Kathryn from Making Your Money Matter proved me wrong. It’s possible, and after I filed my 2019 tax return, he wrote to me and sent me his ridiculously comprehensive tax planning spreadsheet, which he prefilled with my 1040 dates that he disclosed.
I have elected to make only traditional tax-deferred contributions to my individual 401(k). I decided against a Roth conversion.
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Using this tool, I learned that donating an additional $36,865 to our donor recommended fund combined with other individual deductions we made in 2020 optimized my QBI deduction to $64,235. Here is that calculation.
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Filling out the sheet looks like a lot of work, but all the numbers in the sheet above are from a different place in the table. Change your information in a few key places and all the sheets will be filled in as if by magic.
He tells me he has put thousands of hours into this project and I believe him. As such, he charges money per download, but the cost is less than what a quality CPA like him would charge clients for just an hour. Also, it’s a one-time purchase, but you get yearly updates every year with new tax information for each year, so you can use it year after year.
The packaged planning tools cover much more than just tax planning; are designed to keep your entire financial life streamlined and connected. This sheet is an excellent supplement to a course in a course like WCI’s Fire Your Financial Advisor, where you will learn the points tracked in the series of sheets.
Full Disclosure: I’m a big believer in Kathryn and the tools she built, and I hope to save hundreds of dollars (possibly thousands) in taxes thanks to her. I’ve chosen to become a Referral Partner, and if you choose to purchase something from their store at Making Your Money Matter (you can also find free resources here), you are financially supporting Physician on FIRE and our nonprofit mission.
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Kathryn Hannah is a CPA working towards her Personal Finance Specialist (PFS) designation. He currently lives in Shanghai where he loves to explore the city and works remotely for a financial planning firm that focuses on tax planning and compliance.
A few years ago I was exploring the jungles of Cambodia with my family. But it wasn’t Angkor Wat or the hundreds of complex temples that fascinated me the most: it was the incredible Khmer. As my 3 year old daughter and 1 year old son played in the dirt with the local children and animals I realized how happy they all were. They worked together, played, cooked, talked, laughed and just took care of each other.
Here I was, spending five figures on a two week trip to Cambodia and Vietnam, literally more than most of these guys made in a whole year of grueling work.
How could it be possible that they appear happier and more fulfilled in their lives than I do? Happier than most Americans, literally the richest country on earth? And why did I pay so much money when my kids just wanted to play on the dirt?
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Spoiler alert: Happiness has nothing to do with material possessions, much less what you own
It was my trip to Cambodia that made me realize that I had an opportunity to build something
The life for me that I wanted. I had opportunities that so few people in the world have.
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I became obsessed with learning about personal finance. I consumed as many books, blog posts, and courses as I could. I knew I had to master money to help me build the life I really wanted, a life where money was a tool to help me achieve my dreams and not a source of fear and limitation .
I needed more than a budget – I needed a resource that would help me have complete confidence that I was putting the “right” money to work. I needed to figure out if I was saving enough for retirement, if I had the right insurance to protect my wealth, and most importantly, I needed to learn about investing and move beyond automating contributions to a fixed date fund.
So I created it in spreadsheet format. I’ve gone from a typical CPA nerd to a full-fledged CPA nerd, creating my own spreadsheets for fun, consoling budgets on a down day, and preferring to read Physician on Fire blog posts over Roth’s contributions to novels.
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After a few hundred hours on the project, I realized that a lot of other people could benefit from it.
In it he had something he trusted that people could use to manage literally every aspect of their finances.
Every hour invested, every Google search typing “how to _____ in Excel” was one step closer to helping someone else find the financial peace in their life I had discovered was possible.
As a caveat, I would like to say this: I think some people should hire a financial advisor. There are “good guys” who charge a fair fee and act as trustees for their clients. I know that PoF provides a list of verified financial advisors who meet these criteria.
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And then let me say this: I also believe that most people can manage their finances on their own. That is, if they are willing to take the time to educate themselves on the issues relevant to their own specific financial situation and seek advice when needed.
I share a little bit about how I set up my own system which can be purchased here or I can give you ideas for creating your own!
Few people, even high-income professionals (we know doctors aren’t known for being good with money!), go beyond managing a budget.
Just having a budget is not enough to achieve financial success. It’s important (a lot!) to be mindful of your spending, but it’s crucial to cover other aspects of your finances as well.
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This includes creating financial goals, analyzing debt-payoff strategies (your med student loans!), minimizing your taxes, analyzing your insurance coverage, determining how much you need for retirement, and more. This workbook aims to fill this gap.
At the heart of financial planning is basic cash flow analysis. I start with an annual budget that is updated with actuals throughout the year. Knowing how much you make and spend each year gives you the peace of mind to plan for so many other aspects of your finances.
This information can be imported from any budgeting software you currently use (I love YNAB and Tiller!) or you can use this spreadsheet directly to enter transactions.
I designed my workbook to use cash flow information to seamlessly fill out other aspects of financial planning. Examples include extracting income and deductions for tax planning spreadsheets, using expense information to determine life and disability insurance needs, estimating retirement needs, and more.
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