The percentage of income you should save for taxes includes several variables, such as your federal and state tax income tax rates, current year's anticipated income and current year's anticipated tax deductions. Once you determine these variables, you can make a decision on the percentage of income you should save for taxes.
Estimate Your Current Year Income
Determine what your annual income will be for the year. If you’re an employee, you can estimate your estimated gross income by taking your average monthly income and multiplying it by twelve. If you’re self employed, you should refer to your profit and loss statement to determine what your annual income will be by taking an average month net profit and multiplying it by twelve.
Estimate Your Tax Deductions for the Year
Calculate your estimated tax deductions for the current year. This includes your itemized deductions on schedule A of the federal return and your personal exemptions, which are $3650 for yourself and your spouse. If you’re in business, you must estimate your expenses for the year by taking your average monthly expense total and multiplying it by twelve. Also, include any anticipated contributions to your IRA for the year.
Estimate the Tax for the Current Year
Estimate your current tax by taking your estimated income and subtracting your estimated deductions for the year. Next, estimate taxes by looking at the federal and state income tax rates that applies to you. The Internal Revenue Service handles your federal tax and the state handles its own taxes via different agencies in each state. For example, in California the Franchise Tax Board handles state income tax and in Virginia, it’s the Department of Taxation. Once you’ve estimated your income tax, determine the tax rate percent by dividing the tax amount by the annual income. For example, if you estimate your total tax to be $7,000 and your income is $35,000 then the percent is 20 percent -- $7,000 divided by $35,000.
Set the Amount Aside Each Month
Set aside the percent of taxes each month. Once you’ve ascertained the estimated income tax percent on your income, apply this to each months income by multiplying your monthly income by the estimated income tax percentage. For example, if your monthly income is $6,000 and you’ve determined your percentage of tax is 20 percent then the amount you should be setting aside for taxes is $1,200.