Jan 18, 2009

2008 Taxes, Part 1: Did my 50% of income strategy work?

In 2008, I tried a financial strategy meant to keep me both "in-the-know" and "out-of-the-know" at the same time. This simple strategy was to save 50% of my income for taxes in a high-interest savings account. As a self-employed person this was legal, as long as I paid 90% of my previous years' tax along the way. Being as in 2007 I made less than $30k and my income shot up to $58k in 2008, this made a whole lot of sense.

The outcome of my 2008 plan seemed to have worked decently. I just tallied up my tax figures for the year, not counting any deductions I or Turbo Tax may take, and my total tax owed for 2008 is $22876. This includes my 25% tax bracket federally, $15.3% self employment tax, and $9.3% tax bracket in California (why is California one of the highest tax states to live in yet we're also the deepest in debt???)

I saved $26,000 for taxes after paying $4315 in estimated taxes over the year (I still owe my Jan 15 estimated tax for federal, need to send that out, but I hear it's not late as long as you get your return in by Feb 2.)

So, number crunching that means sans deductions, I still owe $18,562, leaving me with $7438.17. I'm sure with deductions it will be a little less then that and then with my various interest income from different accounts it will be a little more. I'm guessing I'll end up with at least $7200 to save.

So the good news is I start 2009 off with $7,200, or thereabout, to spread about in my various accounts as a "cushion" for the year. Sweet. Still deciding on whether to get a tax accountant for my 2008 returns, though I figure even if I don't take any deductions I'll get

In 2009, my tax situation is an entirely different story. My income may go up a bit, but I'm now a full-time employee, so I can't shelter as much money from taxes over the year... nor do I really want the headache. In my next post, I'll describe how I'm planning to take a more active approach to budgeting in 2009.


TStrump said...

I'm self employed too, but thinking of going back to being an employee.
I am also in the same boat where I have to put aside money for my 2008 taxes ... and haven't quite done it yet!
Not sure it's worth being self-employed because no one wants to pay decent contract rates.

Claire said...

The cushion being anything you didn´t spend on anything else in 2008?

Thanks for being so open about your finances, v. cool.

claire at choyster cash

her every cent counts said...

@Claire Yea, the cushion is money I saved for taxes in an ING account. I saved 50% of my income and told myself that would all go to taxes, even though I knew my taxes would be more like 40 - 45%. The extra cash will be used to front load my various savings accounts for 2009 - specifically my retirement and downpayment funds. Possibly also a fund for grad school, though I may just combine that with my downpayment fund at this point.

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