2015 Free Money!

Greetings all!  With 2015 right around the corner, it’s time to start our tax planning.  It looks like the standard deduction and personal exemption amounts are going to increase in 2015*.  It also appears that the child tax credit will remain at $1,000 per child.  These increases in the standard deduction and personal exemptions mean that the government will allow us to earn more money before it expects us to pay federal income tax.    

2015 Free Money for Federal Income Taxes
Standard Deduction Married Filing Jointly $12,600
Personal Exemptions $4,000 * 3 $12,000
1 Child Tax Credit $1,000 / .10 $10,000
2015 Total Free Money $34,600
As the box shows, the three of us will file for the standard deduction of $12,600 using the married filing jointly classification.  We will also claim three standard deductions for a total of $12,000.  Since our son still qualifies for the child tax credit, the first $1,000 of federal income tax will be credited back to us.  That means that we can earn another $10,000 ($1,000 / .10) before we owe any federal income tax.  (The .10 figure represents the 10% tax bracket.)  Our 2015 free money total is $34,600…not bad! 
What does this actually mean?  Simple, any taxable money at $34,600 or below will have a federal income tax rate of 0%.  So, if we can live on $34,600 or less in 2015, Uncle Sam expects us to pay $0 in federal income taxes.
What happens if we need more money in 2015?  If we realize that $34,600 won’t cover our 2015 living expenses, we will withdraw the remainder of the 10% tax bracket.  The remainder of the 10% tax bracket will be $8,450.  (The maximum of the 10% tax bracket is $18,450 minus the $10,000 from our child tax credit.)  Now, our 2015 income would total $43,050 with a tax obligation of $845 ($8,450 * .10).  That is an effective federal income tax rate of 1.96% ($845 / $43,050).  See below:


Total Free Money $34,600
Remainder of 10% Tax Bracket $8,450
Free Money + 10% Bracket $43,050
Effective tax rate of 1.96%

What if we need even more money?  In that case, we would realize that all money after $43,050 would be taxed at the 15% federal income tax rate.  In other words, every $1,000 beyond the 10% bracket would carry a tax obligation of $150.  Not too bad, but certainly more than we paid in the 10% bracket.  However, just being aware of our tax breakpoints will enable us to make informed tax decisions in 2015.

I hope this helps you hammer your financial plans in 2015.  What do you think?  Did I forget anything?



Notes:  * 


    • Ed Mills

      Laura, I’m not sure how it works in England. Here in the States, the government allows you to earn varying amounts of money before federal income tax kicks in. Good luck finding your free money in England!

  1. Jon


    This is kind of digging up the past, but MadFi just linked me here this morning, I’m excited to have a new world of information to explore. How does this work with a taxable investment account that pays dividends? I expect to retire once I have enough in dividends to cover my cost of living + tax burden, but I don’t know a whole lot about the tax side yet. Are the dividends taxed both as capital gains and as income? If so, isn’t your effective tax rate much higher than ~1%? Or, are you referring to taxable income you can make this year and pay essentially nothing for, to help continue to build wealth after your investment gains are taxed?

  2. Simon

    How will the child tax credit “free money” adjustment play out if you did move into the 15% range, would it be worth $1000/0.15 = $6666.67 only?

  3. rachel

    Just found you via The Mad F – yours is a pleasing story from a fellow dual educator household.

    how does the math work with 2 children? standard deduction stays at 12,600, personal exemptions becomes 16,000 and then 2 child exemptions is 20,000 for an income total of 48,600. But 2 x 10,000 is over the 18,450 so is just the excess piece ($1,550) taxable at 15% so $232 in tax?

    • Ed Mills

      Hi Rachel,
      Your free money number with two children would be:

      standard deduction: $12,600
      4 personal exemptions: $16,000
      2 child tax credits: $19,483*
      2015 Total Free Money: $48,083

      *($2,000 of child tax credits – $1,845 takes care of 10% bracket with federal income tax ($18,450 * .10 = $1,845) However, you still would have $155 of tax credit that would allow you to earn another $1,033 ($155/.15) at your free money level. Summary for your child tax credits: $18,450 + $1,033 = $19,483.

      Check my numbers and tell me what you think. I hope this helps; keep in mind that I am not an accountant, CPA, or tax expert!

  4. Catherine

    Does the 457 have to be direct contribution from payroll deduction? Can you suggest good resources to understand this better? Do all school systems have to offer the 457? I,too,am an educator, and you and your family are amazing.

  5. Suzanne

    So, can you tell me if I’m doing my math right for my 2015 free money? I’m single, no children. Here’s what I’m thinking:

    $6,300 (standard deduction)
    $4,000 (exemption for 1 person)
    $9,225 (10% bracket cap for single filers)
    TOTAL 2015 free money for single person: $19,525

    Thanks & please let me know if I’m missing something.

    • Ed Mills

      Thanks for the visit Suzanne,
      Your total free money for 2015 is: $6,300 + $4,000 = $10,300. This money is your true free money…you would owe $0 on it!
      Your 10% bracket is $9,225 with a tax obligation of $923. That means you would have an effective tax rate of 4.73% ($923 / $19,525). So yes, your numbers look good!


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