I’m excited to share a tax planning tool that I’m thrilled to have discovered a year ago. I’m not one to overpromise or underdeliver, and this thing, recently updated for both the 2022 and 2023 tax code, is simply amazing.
I had previously spent hour upon hour creating a spreadsheet of my own to best approximate my tax liability to test out how some of the many tweaks available to me would impact various facets of my upcoming tax return, including:
Some things that I could do toward the end of the year that would impact the above include:
- Roth or Traditional 401(k) Contributions
- Roth conversions
- Charitable Giving
- Realizing Capital Gains
- K-1 Reported Income from Websites & Real Estate Investments
If you’ve never tried to do this yourself, I’m here to tell you, it’s complicated. One change impacts several calculations, and what might seem like a good idea can be a very bad idea, and vice versa.
Making the wrong move can easily cost you thousands of dollars in lost tax credits or tax deductions. Some deductions are based on taxable income, some are based on Adjusted (or Modified Adjusted) Gross Income. In some cases, certain types of income are added back in, like dividends earned that are removed from your taxable income when calculating the QBI deduction.
There are some other tax credits and income thresholds that may not be important to me now, but they might be crucial for you (or for me in the future), such as the:
- American Opportunity Tax Credit
- Lifetime Learning Credit
- The Earned Income Credit
- ACA Subsidy Brackets (and Tax Cliffs)
- 0% Long-Term Capital Gains (and Qualified Dividends) Bracket
I realized that a single sheet in Excel wasn’t going to be able to factor in all of this, even if I left out everything that didn’t apply to me and my tax situation.
I stopped working on my spreadsheet when it was at the “better than nothing” stage while realizing I didn’t have the skills to incorporate all the ins and outs of the monstrosity that is the U.S. tax code. Frankly, I wasn’t sure it was even possible.
Kathryn from Making Your Money Matter proved me wrong. It is possible, and after I published my 2019 tax return, she wrote to me, sending me her ridiculously thorough tax planning spreadsheet that she had pre-filled with the data from my 1040 that I had revealed.
With this powerful tool, I was able to confidently make some year-end tax decisions.
I decided to make only traditional, tax-deferred contributions to my individual 401(k). I opted not to make any Roth conversions.
Using this tool, I learned that donating an additional $36,865 to our donor advised fund, when combined with other itemized deductions we took in 2020, optimized my QBI deduction at $64,235. Here’s that calculation.
Like I said, it’s complicated. But Kathryn nailed it. Her spreadsheet skills are beyond compare.
Filling out the sheet looks like a ton of work, but every number on the sheet above is pulled from somewhere else in the spreadsheet. You change your info in a few key places, and all the sheets are filled in like magic.
She tells me she’s put thousands of hours into this project and I believe it. As such, she does charge money for the download, but the cost is less than what a quality CPA like her charges clients for just one hour of time. Also, it’s a one-time purchase but you’ll receive annual updates every year with each year’s new tax info, so you can use it year after year.
The planning tools she’s packaged include much more than tax planning; they’re designed to keep your entire financial life optimized and connected. This sheet makes a great complement to a course to a course like WCI’s Fire Your Financial Advisor that teaches you about the items tracked in the series of sheets.
Full disclosure: I am a big believer in Kathryn and the tools she’s created, and I expect to save hundreds of dollars in taxes (possibly thousands) thanks to her. I have opted to become a referral partner, and if you choose to purchase anything from her shop at Making Your Money Matter (you’ll find free resources here, too), you’ll be financially supporting Physician on FIRE and our charitable mission.
Below you’ll find her bio and the guest post she wrote for us.
Kathryn Hannah is a CPA working toward her Personal Finance Specialist designation (PFS). She currently lives in Shanghai where she loves to explore the city and works remotely for a financial planning firm focusing on tax planning and compliance.
A few years ago, I found myself exploring the jungles of Cambodia with my family. But it wasn’t Angkor Wat or the hundreds of intricate temples that enthralled me the most: it was the incredible Khmer people. As my 3-year-old daughter and 1-year-old son played in the dirt side-by-side with the local children and animals, I realized how happy everyone was. They worked, played, cooked, talked, laughed together and simply took care of each other.
Here I was, spending five figures on a two-week trip to Cambodia and Vietnam, literally more than the majority of these people made in an entire year of back-breaking work.
How could it even be possible that they seemed happier and more fulfilled in their lives than I was? Happier than most Americans, literally the wealthiest country on earth? And why did I pay this much money when my kids just wanted to play in the dirt anyway?
Spoiler alert: happiness doesn’t have anything to do with what material goods you have and even less to do with what you don’t have.
It was my trip to Cambodia that sparked in me the realization that I had the opportunity to build any life for myself that I wanted. I had opportunities available to me that so very few people in the entire world have.
A SPREADSHEET IS BORN
I became obsessed with learning about personal finance. I consumed as many books, blog posts, and courses as I could. I knew that I needed to master money in order to help me build the life I really wanted, one where money was a tool to help me fulfill my dreams and not a source of anxiety and restriction.
I needed more than a budget: I needed a resource that would help me gain full confidence that I was doing money “right”. I needed to figure out if I was saving enough for retirement, if I had the right insurance in place to protect my assets and I especially needed to educate myself about investing and go beyond just automating contributions to a target date fund.
The tool I was looking for to create my financial plan didn’t exist.
So, I created it in the format of a spreadsheet. I went from being a typical nerdy CPA to a full-blown CPA nerd that builds spreadsheet in her own time for fun, finds budgeting comforting on bad days, and prefers reading Physician on Fire blog posts about backdoor Roth contributions over fiction novels.
Several hundred hours into the project, I realized that this was something that so many other people could benefit from. Several thousand hours into it, I had something that I was confident people could use to manage literally all aspects of their finances.
Every hour spent, every google search typing in “how to _____ in Excel” was one step closer to helping another person gain the financial peace in their lives that I had discovered was possible.
As a caveat, let me just say this: I think some people should just hire a financial advisor. There are “good guys” out there that charge a fair fee and are fiduciaries for their clients. I know PoF provides a list of vetted financial advisors that meet these criteria.
And then let me say this: I also think that most people can manage their finances themselves. That is, if they’re willing to spend the time to educate themselves on the topics applicable to their own specific financial situation and get guidance when needed.
I’m sharing a little about how I’ve set up my own system, which is available for purchase here, or can give you ideas on creating your own!
TRACK THAT CASH FLOW – BUT DON’T STOP THERE
Few people, even high-earning professionals (we know doctors don’t have a reputation for being great with money!), go beyond managing a budget.
Simply having a budget isn’t enough to achieve financial success. Being intentional with your spending is important (very much so!), but it’s crucial to cover other aspects of your finances as well.
This includes creating financial goals, analyzing debt payoff strategies (those medical school student loans!), minimizing your taxes, analyzing your insurance coverage, determining how much you need for retirement and more. This workbook is designed to fill that gap.
Here are the main topics that are covered in a financial plan (and in my workbook):
- Cash Flow Analysis
- Net Worth
- Debt & Credit Management
- Federal & State Taxes
- Saving & Investing
- Retirement Planning
- College Planning
- Estate Planning
The core of financial planning is basic cash flow analysis. I start with an annual budget, which is updated for actual data throughout the year. Knowing how much you earn and spend each year allows you the confidence to plan 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 directly use this spreadsheet to enter transactions.
I designed my workbook to use the cash flow information to seamlessly populate other aspects of financial planning. For example, this includes pulling income and deductions in for tax planning spreadsheets, utilizing spending information to determine life & disability insurance needs, estimate retirement needs, etc.
TAXES – JUST DO PLAN IT
Ever had an April 15th surprise tax bill? That’s the absolute worst. I can tell you it’s not fun being the bearer of that bad news for clients, either. That’s the almost absolute worst.
By using a combination of actual and estimated data for the entire year, the workbook provides a continuous estimate of your annual tax liability and even helps you calculate estimated payments throughout the year.
If you know your way around a 1040, you’ll love that the tax summary provided follows the same format. If not yet familiar, this will provide valuable education to piece together your tax puzzle and see how your income and expenses fit in.
Not only will it help you to calculate your tax bill, but also help you identify planning opportunities including:
- How much room you have left in your ordinary tax bracket (great for Roth conversions when you’re in a low bracket)
- How much room you have left in your preferential tax bracket (i.e. qualified dividends and long-term capital gains)
- Whether or not you are eligible to contribute to a Traditional or Roth IRA
- Ability to run an additional scenario to determine the impact of making an IRA contribution, adding additional income, contributing to a Donor Advised Fund, etc.
- Optimizing the QBI deduction for business owners [PoF: my favorite part!]
The tax planning portion alone is worth the price of the entire workbook. As a CPA, I spent hundreds of hours ensuring that the calculations were correct, testing and incorporating as many tax laws as possible while making it an easy(er?)-to-use tool. Literally for significantly less than the cost of hiring a CPA for an hour.
Plus, I made it easy to update it with new phaseouts and brackets when the IRS updates these numbers for the new tax year. So, you can use it every year!
PUTTING IT ALL TOGETHER
You know how else taxes have an impact on your financial plan? Literally every piece of it has a tax impact.
My career change from being a CPA into financial planning was more of a slight pivot. Taxes affect everything from which debt to pay off first to college and retirement funding. While taxes were at first my main focus in the workbook, there were so many other things that were essential.
Debt is one of the greatest sources of stress in peoples’ lives. From making a debt payoff plan to tracking your loan amortization, reviewing your credit scores and reports and even organizing your credit cards if you’re a points junkie like me, organization is key.
When was the last time (if ever?) you thoroughly reviewed your homeowners and auto insurance policies? Do you know what your current deductibles are?
Life and disability insurance are just as important as property insurance (covering an even greater loss potential!). Using cash flow information readily available, it’s easy to see the gaps in insurance so that you can be confident that your hard-earned assets are protected.
Saving & Investing
Investing can be overwhelming to someone first entering the world of personal finance. There are a lot of moving pieces such as these:
- Creating an Investment Policy Statement (IPS)
- Determining and tracking your current and desired asset allocation
- Tracking your investment performance
- Determining preferred account location by tax status for particular investments
Retirement and College Planning
One of the biggest mistakes I see people make is not seeking out help with their personal finances until they’re close to retirement and want to know if they have enough to quit working. This isn’t nearly as much a problem in the FIRE community of course!
The process of planning for retirement is as follows:
Step 1: Determine your retirement income (pensions, annuities, social security)
Step 2: Determine your expected retirement spending
Step 3: Calculate the lump sum needed at retirement to cover the excess of spending over income
Step 4: Calculate how much you’ll need to save to meet your retirement lump sum goal and optimize those savings in tax-efficient accounts
Step 5: Run additional analysis to ensure that your plan is sound and has some buffer.
You’ll want an attorney to help you draft up estate planning documents, but there are a lot of decisions that people get stuck on in order to get to that point.
It’s difficult, especially for younger people, to sit down and think about these painful questions, but if you have dependents, it’s the greatest act of love you can do for them.
All these pieces together make up your financial plan and the most important piece would be the one you’re least prepared for.
[PoF: A thorough legacy binder makes a great companion to expand upon this portion of the bundle.]
A FINAL NOTE
Financial planning is an ongoing process, as all (good!) financial advisors will tell you. Having up-to-date information linked in an easy-to-use format allows you to continually look at your financial plan and enable you to make timely decisions about your money.
There’s such an immense lack of trust in the financial industry (and rightfully so) and many other reasons someone might want to manage their own personal finances. For less than 1/20 of the price of even a low-cost, fee-only financial planner, this might be just the thing to guide you.
If you want to learn more, please check out these links:
- Get more details, video preview, screenshots, and look up FAQ’s here.
- Purchase the bundle here (includes both Excel and Google Sheets versions).
- Get some additional free resources for setting financial goals and setting up a budget here.
Also, note the generous refund policy on the personal finance bundle: “If you are not 100% satisfied with your order, we ask that you first send an email with the issues that are causing you to be unhappy with our product (we can help!). If we are unable to resolve your issue, we will happily issue a complete refund within 30 days of purchase. Learn more here.”
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