2016 Free Money!


Fall Camp Out with Cub Scouts…Much More Fun Than Tax Planning!

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:

2016 Free Money!
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
Effective Tax Rate of 0%!

10% MONEY 
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:

2016 Free Money + 10% Money
Free Money $34,750
10% Money $8,550
Total Money$43,300
2016 Federal Income Tax Obligation of $855
Effective Tax Rate of 1.97% ($855 / $43,300)

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 MonthWeekDay
$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.


    • Total Free Money: $10,350
      Free + 10% Money: $19,625
      Effective Tax Rate: 4.73%
      Grade: A+, plus you’re now the teacher’s pet for submitting your answers first.

  1. ElleX

    Hi! I have a SINK household. I hope I calculated this correctly:
    Standard deduction of $6,300
    Personal exemption of $4,050
    Bracket cap of 10% of $9,275
    Total Free Money: $19,625

  2. Joe

    Family of 4 with 1 in college.

    Standard Deduction: Married Filing Jointly $12,600
    Personal Exemptions: ($4,050 * 4) $16,200
    Credits: (1 Child Tax Credit of $1,000 / .10) $10,000
    (1 American Opportunity Tax Credit of $2500) ($855 / .1 + 1645 / .25) 15,130

    If I did this right – $53,930 of free money !!!

  3. Boyd

    So is this correct?

    Married filing jointly: $12,600
    Personal Exemptions: ($4,050 * 6) $24,300
    Credits: (4 Child Tax Credits of $4,000 / .10) $40,000

    Total Free Money: $76,900

    • Boyd, your math looks good until the child tax credits. You will have $4,000 of tax credits if your children qualify, but it will not yield $40,000 of tax-free income. Instead, it will yield:

      $18,550 (from 10% bracket) + $14,300 (from 15% bracket) = $32,850

      It looks like your magic number will be $69,750 ($12,600 + $24,300 + $32,850). Wow, it looks like I need more kids…Happy New Year! Ed

  4. Tim

    Does this calculatoin consider other write-offs? This is the first year my wife and I are home owners, though not sure that is relevant for this exercise.

  5. shane

    can i see if i do this correctly?

    will be a family of 4 sometime in march

    standard deduction-12,600
    personal exemptions-16,200
    credits-2 child tax credits of 18,550
    total-47,350. i think that’s a bit wrong but i took a shot, lol

    • Shane, your numbers look good until you calculate your tax credits. Your $2,000 of child tax credits take you past the 10%-tax bracket ($18,550 * .10 = $1,855 of federal income tax). You still have $145 of tax credit left that allows for another $967 ($145 / .15) of income before you begin paying tax in the 15%-tax bracket. Here are your numbers by my calculations:

      Standard Decuction: $12,600
      4 Personal Exemptions: $16,200
      2 Child tax credits: ($18,550 + $967)
      Total: $48,317

      Oh yeah and most importantly, congrats on the new addition to your family. Although your entry was a little off and past the submission deadline, I hereby award you full credit for the assignment.
      Thanks for reading, Ed

  6. Luke

    DINK couple. MFJ–no kids!

    Standard Deduction: $12,600
    Personal Exemptions: $8,100
    CREDITS: None

    FREE MONEY: $20,700
    10% tax: 39,250

    Sorry..the 10% part confused me a bit. Did I get that right?

    • Luke, your math looks good to me. Your effective tax rate on $20,700 is 0% and on $39,250 it’s 4.73%. Good numbers to know for sure. Also, look into qualifying for the saver’s credit…you two might be able to get that. Even though it’s six months late, I hereby award you full credit for the assignment.

  7. Keith

    I’m new to calculating taxes, I’ll give it my best shot.

    Standard Deduction: Married Filing Jointly- $12,600
    Personal Exemptions: ($4,050 * 2) $8,100
    10% Money: $18,550 (this is the part that confuses me, it’s just my wife and I, so is it a full 18,550?)

    Total: $39,250

    • Keith, it looks good to me. So, on $39,250 of income you would owe $1,855 of federal income tax. That’s an effective tax rate of 4.73%…that’s good info to know. Good luck working your plan. Grade A- because it’s 7 months late! Ed

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