Anybody out there like free money besides this guy? Yes, it’s October, so it’s time for the IRS to release valuable tax information for the upcoming year. I’ve been hawking the internet for the 2016 tax-code changes and finally came across this reliable source. As usual, we plan on using this tax information to 1.) determine our free money and to 2.) develop a comprehensive tax plan for the next year. Let the tax planning begin!
My regular readers know that our “free money” consists of three main components: the standard deduction, our personal exemptions, and our tax credits. The total of these three amounts provides us with our free money amount. In 2016, it appears that we’ll be able to earn $34,750 of income before we owe any federal income tax. Because we’re a small family who claims only one significant tax credit, our free money calculation is fairly simple.
In 2016, we’ll claim the “married filing jointly” standard deduction of $12,600, three personal exemptions totaling $12,150 ($4,050 each), and claim one child tax credit of $1,000. Since the lowest tax-bracket is 10%, our child tax credit of $1,000 will allow us to earn $10,000 free of federal income tax ($1,000 / .10). If you are a visual learner, check out the table below:
|Standard Deduction: Married Filing Jointly||$12,600|
|Personal Exemptions: ($4,050 * 3)||$12,150|
|Credits: (1 Child Tax Credit of $1,000 / .10)||$10,000|
|2016 Total Free Money||$34,750|
After determining our free money, we like to make one more calculation. We always want to know how much more money we can earn at the 10% tax bracket. Since the IRS tax code allows a married couple to earn $18,550 at the 10% tax rate, we can still take some income at this low rate. (A few years ago I confused a number of readers with this calculation. Here’s my second attempt at explaining this sexy tax math.)
First, you have to determine how much of the 10% bracket you have used with your tax credits. For example, because we have 1 child tax credit of $1,000, we will actually use up $10,000 of the $18,550 at the 10% tax bracket. (Remember, a credit allows you to reduce your tax liability, so a $1,000 credit covers the taxes on $10,000 of income. Said another way, $10,000 of income at the 10% tax rate has a tax liability of $1,000.)
In our case, we simply subtract $10,000 from $18,550 to determine our 10% money amount of $8,550. This means that we can earn $8,550 above our free money amount before we enter into the 15% tax bracket. At the 10% tax rate, we would owe $855 on our $8,550 of 10% money.” When we add our 10% money and our free money, we have $43,300 of income with a federal income tax obligation of only $855. Our effective tax rate on an income of $43,300 would be a puny 1.97%! Check out the numbers below:
Here is a breakdown on our income scenarios for the 2016 tax year. I think that we could live very well on $2,900 to $3,500 a month in our current town in Georgia; that money would go even further in Cancun, Mexico. By knowing how much tax we’ll owe at various income levels, we are able to make informed financial decisions. If you have a problem with your taxes, don’t just complain about it, do something about it. Tax planning is your first step.
|2016 Income Options||Month||Week||Day|
|$34,750 with $0 Tax||$2,896||$668||$95|
|$43,300 - ($855 of Tax)||$3,537||$816||$116|
Okay students, do you know YOUR free money amounts for 2016? How about your free money + 10% money amount? Please post your numbers in the comment section. You may use any of the information or links provided in this post to calculate your answers. All answers must be posted before December 31, 2015.
|Health Savings Account: We use Elements Financial to access commission-free, low-cost Vanguard ETFs at TD Ameritrade.