• Thanks GB! Comments like yours are the reason I continue blogging. It’s nice to know that someone derives value from my posts. Good luck working your plan. Ed

  1. Ahhhh! This is exactly the kick in the pants I needed to get my 403(b) sorted once and for all. We are going to be in the 25% tax rate because of exactly what you said: we let the government dictate to us. Mostly because I still feel like our 403(b) options are the deep end of the pool

    I must get this solved this year so things are less painful next year. A second holdback is me wondering if paying taxes on my 403(b) is a good idea when I’m collecting a pension. Theoretically, our income will be even higher when we’re older. Obviously, this assumes that our state will be able to fund our pensions (insert side eye and skepticism here).

    • Penny, remember that you can always use your IRA and 403b/457 accounts to dramatically reduce your federal income taxes. Ideally, you want to get your income down to your “sweet spot.” I realize that it’s not always so easy when you need money for living expenses and debt servicing (especially student loans). As for the 403b taxation problem, I plan on minimizing the taxation of my retirement savings by slowly converting my IRA money (where all of our 403b savings are rolled) to Roth IRA accounts. For example, I plan on converting $30k while also staying within my 2016 Free Money + 10% Money income goal ($43,300). Next year, the plan is to convert $25k more…rinse and repeat. That way, I should be able to draw a pension and pull money from a pot of tax-free income.

      Here’s a good article on Roth IRA conversion laddersfrom Justin at Root of Good

        • Penny, I haven’t written anything about why I choose to invest in traditional IRA’s before Roth IRA’s. For some reason, my instincts always pushed me to maximize savings AND minimize my taxes. Since the the traditional IRA is tax-deductible, I went with it. Don’t get me wrong, I like the idea of tax-free money that the Roth IRA provides, but not enough to pay tax for it. This year I plan to start rolling money from my traditional IRA to my Roth IRA. Of course, my rollovers will be with in my 2016 Free Money + 10% range of $43,300. It looks like this years rollover will be $30,000 with a tax obligation of about $900. Over the next 10 years, my wife and I plan to slowly roll IRA money to our Roth IRA’s to have a source of tax-free funds. Here are some good reads on the subject: #1 and #2

    • Thanks Sr. Mayfield! I passed through your neighborhood a few weeks ago and nobody was home. I guess you were at the Auburn vs. LSU game. Give my regards to the Grangers. Ed

  2. Great post, always nice to have a helpful reminder! My wife and I try to maximize all our pre-tax deductions including 401k, IRA and HSA contributions. We also have a few unique tax deductions this year with our Federal / State Solar rebates (we bought solar panels for our home). But we have relatively high salaries so we still pay our fair share. I calculate my effective tax rate every year and the last 5 years it has ranged from 25-30% (federal and state).

  3. Jennie H

    This is a great article! I claim HoH each year and either have 2 children or 1 child as credits/personal exemptions, depending on the year. I tried doing the calculations with HoH to do a comparison of even and odd years and got stuck at the 10% calculation and federal tax obligation with HoH. Help!

    • Greetings Jennie,
      Luckily for you I already have one of your calculations ready; my sister-in-law is also head of household with 2 kids. Here is the breakdown:

      Standard Deduction: $9,350 + 3 Personal Exemptions: $12,150 + 2 Child Tax Credits: $17,783 = Total Free Money: $39,283

      You 2 child tax credits save you from $1,335 of tax in the 10% bracket ($13,350/.10) and $665 in the 15% bracket ($2,000 – $1,335= $665) This $665 of credit allows you to earn $4,433 ($665/.15) more in the 15% bracket before you owe any federal income tax. With two kids you will not have any 10% money. Be aware that any money beyond your free money amount of #39,283 will be in the 15% tax bracket.

      With 1 child tax credit here are your numbers:

      Standard Deduction: $9,350 + 2 Personal Exemptions: $8,100 + 1 Child Tax Credits: $10,000 = Total Free Money: $27,450
      Plus, you will have some 10% money available ($13,350 – $10,000 = $3,350) with a tax obligation of $335.

      Free Money + 10% Money = $27,450 + $3,350 = $30,800
      Effective Tax Rate = $335 / $30,800 = 1.09%

      Thanks for checking out my blog! Ed

    • Hello Maggie,
      I had to go back and relearn some tax math to get your number, so if you’re feeling a little confused, you’re in excellent company! Here is what I got:

      Standard Deduction: $12,700 + 5 Personal Exemptions: $20,250 + 3 Child Tax Credits: $26,217 = Total Free Money: $59,167

      The child tax credits confuse me sometimes. You get a $3,000 worth of tax credits from your 3 children. This means that all of your 10% money is done (18,650/.10= $1,865), but you still have a remaining credit of $1,135 left ($3,000 – $1,865). You actually eliminate some tax obligations in the 15% bracket due to your 3 child tax credits: $1,135/.15 = $7,567 beyond the 10% tax bracket. Any money beyond your free money amount will be in the 15% tax bracket. Good info to know for sure. Thanks for visiting.

      • Lisa R

        Hi Ed. We also have 3 children, and are filing MFJ. So we’re also $59,167. Thanks for working that out for me!

        But I’m wondering how we can “lower” our income to even the 15% limit of $75,300 because we’re not educators.

        My husband earns ~ $102,000. Earlier this year I landed a position which earns $65,000.

        We can both max our company 401ks, which will lower our income by $36,000. I also have a dependent care FSA and I can max that out at $5,000 (that should take care of summer day care for the kids). We do have an HSA as well, and those contribution limits are $6750 for a family.

        And… I think that’s about it. I think we make too much money to get a tax benefit from a traditional IRA, don’t we?

        • Hello Lisa,
          I think you’re right about making too much money to get the traditional IRA tax benefit, but you might want to talk with a tax pro to see if they help you reduce your taxable income a little more. Your taxable income looks something like this:
          Total Wages: $167,000
          -401k contributions: $36,000
          -HSA contributions: -$6,750
          -FSA contributions: -$5,000
          Taxable Income = $119,250

          If your modified AGI is more than $118,000 on a married filing jointly return, you cannot qualify for any traditional IRA deduction. Do you have any other deductions at work such as those on your cafeteria plan like health-dental-vision insurance, pension contributions, and such? Those might lower your AGI too. I’m no tax expert, but a real tax expert might be able to help you lower your taxable income enough to deduct (at least some) of your traditional IRAs. It looks to me that you might be able to qualify for a partial deduction but not the full deduction. Good luck and let me know if you’re able to drive your taxable income lower. Ed

    • Bamfmoney,
      The 0% tax rate on dividends for people in the 10-15% tax bracket is certainly worth knowing and remembering. Go Curry Cracker finally drove that info through my thick skull with their awesome tax posts. Their combination of “free money” and “free money via dividends” is incredible. Thanks for reading. Ed

    • Thanks Kurt,
      Knowing one’s personal finance breakpoints and “pain thresholds” before spending can certainly help people make better choices. Instead of paying too much in taxes, people should funnel that money into their financial freedom accounts such as 403b and IRA’s. Tax efficiency usually results in greater wealth. Repeat this process for about ten years and early retirement becomes a real possibility. Thanks for reading. Ed

  4. Chris

    Dear Millionaire Educator,
    Thx for the very clear discription on this topic… Or maybe it’s just I am an educator too?
    I ran my numbers and I can hardly believe it? Does this seem right?

    80000 between my wife and I gross pay
    Less the following deductions:
    12k IRA
    24k 403b
    4800 salary deduction to retirement plan
    12,700 Stand deduction
    16200 excemptions for 4 family members
    10000 for child tax credit for 9 year old (other child just turned 18

    Total taxable=$300??? That’s like $30???

    Does this sound right?

    • Hi Chris,
      First, let me say I like your IRA and 403b contributions…two high fives! Second, your bottom line looks correct to me…that’s some darn good tax efficiency. Nicely done, your grade is an A+. Thanks for visiting. Ed

  5. Anna

    Hello Ed! Just found your blog through Rockstar Finance! This is such great information! Thank you for sharing! I’m new to this whole tax planning but should have looked into it a while back. Do my numbers look right?

    We are DINK (before husband quit for school).

    Standard Deduction (MFJ) $12,700
    Personal Exemptions x 2 $ 8,100
    Total Free Money $20,800

    With the American Opportunity Credit…
    Free Money $20,800
    10% Money $18,650
    15% Money $ 4,233
    Total Free Money $43,683

    The $2,500 AOC offsets the $1,850 tax liability for the 10% money and the $635 tax liability for an additional $4,233 income taxed at 15%.

    Thank you so much! 🙂

    • Anna,
      Your numbers look good to me; great work! I did a little reading about the American opportunity tax credit, and it seems that $4,000 of qualified expenses yield the full credit. (100% credit on first $2k of qualified expenses and then 25% of next expenses up to $2,500 in total credits.) I imagine it’s pretty easy to run up $4k of education expenses, right?

      You are awarded full credit! Thanks for visiting my site. Ed

  6. I am always surprised how many people complain about taxes. When done right, it can be very, very, low.

    Even where I am from, in Canada, our tax rates are much higher but with the right deductions, it is possible to pay a fraction of the Average Joe!

    • XYZ,
      You mean that even in Canada people have some control over their financial life…that’s crazy talk! The money tree is full of low-hanging fruit in the tax code, but everyone seems to want a candy bar. Instead of benefiting from those peachy IRA or 403b deductions that increase your savings and reduce your taxes, most people here in Georgia let Uncle Sam, Mr. PeachState, Mrs. Social Security, and Miss Medicare take the first bites out of their paychecks. It’s hard to build wealth when every dollar has to run the tax gauntlet. Throw in some debt and “high” living into the equation, and you’re assured to get nowhere at the speed of light!

  7. Frugal Vegan Mama

    Here’s my “free $” breakdown:
    Married filed jointly $12,700
    4 exemptions $16,200
    Child tax credit/2 kids $20,000
    Total $48,900

    We max out my 403(b) – $18,000
    And 14 percent of my income is deducted pre-tax and placed in a teachers retirement account for my primary, full-time job.

    My husband and I will have grossed over $50k this year but have no federal tax liability and get the maximum earned income credit, additional child tax credit as a payment instead of a tax credit. That totals a bit under $7,500 in free money. If it weren’t for the retirement savings coming out, we would end up with much less of a tax refund or should I say actual FREE MONEY $$$.

    • FVM,
      It looks like you already know what you’re doing. Getting your additional child tax credit as a payment instead of a tax credit is pretty sweet. I was going to write that uou needed to recalculate your child tax credit, but it looks like you understand your taxes much better than I understand them. Keep up your excellent tax planning work. Grade A++

  8. Myth

    Single individual taxpayer with no kids:
    Standard deduction $7,900
    1 personal exemption $4,050
    Total taxed at 0%: $11,950

    $9,325 will be taxed at 10%

    Does that look right? Thanks for pushing me to stretch my tax planning knowledge!

    • Hello Myth,
      I’m a little confused on your standard deduction. According to the Forbes article, the standard deduction for an individual should be $6,350, not $7,900. That means your free money would be $10,400 ($6,350 + $4,050). You’re free money + 10% money would be $19,725 with a federal income tax obligation of $933. That’s an effective tax rate of 4.73% ($933 / $19,725). Thanks reading and submitting your homework! Ed

  9. Smith

    Hi, Ed. This is great stuff — both from you and your readers. The tax code is so … oh, you know … complex.

    I’m in the 25 percent tax bracket. I’m single and forgot to have kids. (Kidding!) It seems that the lion’s share of tax breaks come from kids. And good for you.

    My question: My marginal tax rate is about 19 percent, year after year. My esteemed accountant says she’s gotten all the tax breaks I can get, and she’s very good and trustworthy. But are there still possibilities about there, besides getting solar energy credits and deductions for home improvements, and the like?

    I’d be happy to call a tax attorney or two if it’s likely I’ll be able to get a make the lawyer’s fees (and a bit more).

    And here’s the funny thing. My father is a tax attorney. My sister is a tax attorney. And they both tell me: “I don’t do that kind of taxes.”

    • Greetings Smith,
      My knowledge is pretty much limited to standard deductions, personal exemptions, and a few credits. I know businesses and real estate create a ton of deductions, but I certainly no expert there. I wish I could be more helpful, but there are limits to my “expertise.” I suggest that you keep pestering your sister and Dad with tons of questions to see if they come up with any suggestions. Thanks for reading, Ed

  10. Smith

    Thanks for your response, Ed. I’ll do just that. And I’ll comment again if free money showers upon me. (It could happen!)

  11. Talile

    A very newcomer question – is all the money I take out into 403b or simple ira just not counted in here? it’s just like my income is lower?

    I am still figuring this out as I just moved from Israel to the US, this post is really helpful and I am now trying to do tax planning for my first full tax year. Thank you !

    • Talile,
      That’s correct. Any money contributed to a 403b, 457, or traditional IRA are tax-deductible. (Roth accounts are not tax-deductible.) This allows you to aggressively save money if you chose to do so. For example, in 2015 I used those accounts to make most of my salary tax-free. I was able to contribute $18K to both my 403b and 457 plans. Because I’m over 50 year old, I was also able to make a catch-up contribution of $6K to each account. That’s $24k to each account for a total of $48K saved and gone from my taxable income. I also contributed $5.5k to my IRA plus a $1k catch-up contribution for a total IRA contribution of $6.5k. In total, I was able to save $54.5 in those three retirement accounts while greatly reducing my taxable income.

      Good luck working your plan. Ed

  12. Alistair


    I’m new to your site (thanks to listening to the Mad Finentist podcast w/ you).

    Have you looked at tax reduction recommendations for military members?

    I’ve done rough math on what happens when military members retire (also true, to some degree, for those who separate prior to retirement). I hear stories of military members shock at the first year tax bill.

    While on active duty, we have TSP (~401K – same plan as Civil Service without gov’t matching until 2018) and IRA access, but as far as I understand, nothing like the 457 or 403b options. Then again, those of us who stick around for 20 years get a relatively healthy pension upon retirement (from military, not 65 (although reservists / Guard are different)). So really, cannot complain too much.

    I max out my Roth IRA for my wife and I. TSP is 10% each month (not maxed – something I’m working actively to fix). Currently, no matching by gov’t for TSP.

    Our housing allowances (BAH) and food (BAS) are tax free, which is a very nice tax advantage, especially in the higher marginal rates (currently 15% for me).

    As I retire in next year or so, my calculations show a massive increase (4-5x) in federal and state income (currently tax free, but not likely upon retirement) taxes. This assumes I get a new job with roughly equivalent take home.

    I really cannot complain about how little taxes I currently pay: ~4% of gross income (all sources). But this will change at retirement as the tax free income will need to be replaced by equivalent after tax income.

    Thus, I’m looking at maximizing tax deductions in order to minimize the impending tax increase.
    There are some good military resources (e.g. military-guide by Doug Nord), but it’s good to get multiple opinions on this.

    Anyway, thanks again for the site and the podcast interview.

    • Alistair,
      Thanks for visiting. I don’t have any military specific advice, but here’s my take. First, when you take your pension, the income will be taxable. So, if you take a new job, your wages plus your pension income will be in a much higher tax bracket. Many pensioners have this problem when they start second careers. One suggestion is to keep using your 401k and IRA (and maybe an HSA) at your new job to minimize your taxable income. Another possibility is to find a new job that offers a 457 in addition to a 401k/403b. That way, you could live off your pension while saving the majority of your salary. You would also be able to keep your taxes in check.

      I anticipate having a similar situation when I turn 60 and start receiving pension income. At that time my pension will be added to my IRA income and could possibly result in a high tax rate (25%+). In order to control my tax rate, I have starting converting some of my IRA money to a Roth IRA. By converting my IRA money now at a low tax rate, I am setting up a more favorable tax situation in the future.

      As for the tax-free housing and food allowances, enjoy them while you have them! Actually, I don’t find living in the U.S. to be too expensive if you cultivate a frugal lifestyle. Living frugally in a low-cost, low-tax state should easily be covered by your pension. Do a little tax planning like this and make your decisions from there. I hope this helps and best of luck. Ed

      • Alistair


        Thanks for the reply.

        I need to figure out if the roth conversion ladder would make sense in my situation. In 2015 I was ~$6K below the top of the 15% bracket after all deductions. I’m using Roth IRAs and the Roth TSP, so possibly some methods to reduce income there, but then not a lot of room to do the ROTH conversion ladder either.

        When I retire from the miltary, I don’t think I can avoid the 25% bracket unless I go to a much lower income job. I still want to serve society in some capacity, so I don’t think I’ll be sitting on the beach somewhere any time soon.

        And who knows how the next Administration will change all these calcs.

        But thanks for what you’re doing. Time to go make my spreadsheet even more complicated…

  13. Nick

    First of all, may you live a thousand years.

    Second, I don’t think I quite get the child tax credit math. I have two kids, we are married, filing jointly so our free money works out to…

    Standard: 12,700
    Personal Exemptions *4: 16,200
    2 Child Tax Credits (2,000/.10???): 20,000
    Total Free Money: 48,900

    Right? So when you get to 10% Money, we’re talking $18,650 – $20,000? How does -$1350 work in?

    • Hello Nick,
      You’re close on the math. You two childcare credits ($2,000) will take care of your 10% bracket of $18,650, so that leaves you with $135 ($2,000-$1,865) of tax credit in the 15% bracket. Here’s the additional free money: $135/.15 = $900. Add $900 to $18,650 and you get $19,100, so your total free money should be $48,000 ($12.7K + $16.2k + $19.1k)…good info to know for sure! Grade: A

      Thanks for visiting and the kind words. Now go work that plan. Ed

      • Rebecca

        I’m in a similar situation as Nick, but I’m not understanding the math. I mostly understand how you got $48,000 in free money, and then are you saying we sort of skip the 10% tax bracket? According to the Forbes article, I am seeing that we could make up to 75, 900 and get taxed only 15%. Would that 15% be taxed on only the amount over $48,000? I am really slow with the numbers!

        • Hello Rebecca,
          Don’t feel bad because I constantly have to re-teach myself this tax math. I sure doesn’t come easy to me either. Yes, Nick “skipped” the 10%-bracket because of this 2 child care tax credits of $2,000. That $2,000 of tax credit eliminated his $1,865 of 10%-bracket taxes ($18,650 * .10). His child credit even covered a little of his income in the 15%-bracket. Remember he had $2k of credit, so after the 10%-bracket, he had $135 ($2,000 – $1,865) of credit which allowed him to earn $900 more without tax ($135/.15). Any dollar beyond his magical $48,000 will be taxed at the 15% level. If he had another child tax credit, it would allow him to earn $6,667 more without owing tax ($1,000 / .15). Does that make sense? Thanks for the question. Ed

  14. Sara

    Hi Ed,
    I calculate my and husband’s (DINK) free money as $37k with retirement savers credit. My strategy is to invest any amounts above that into tax deferred accounts, increasing that as we make more each year. The difficulty I see is that things like FICA and union dues come out of the $37k but are a percentage of our gross income, e.g. when we make $100k we will have 9.5%, $9500, come out of the $37k we live on. Am I looking at that accurately? Anything you can think of that I’m overlooking?

    • Sara, Yes FICA is on every dollar of wages. Sorry! I’m not sure about union dues, but I imagine they’ll be based on every dollar too. We also had pension contributions of 6%+ also take out of our paychecks. It’s hard to keep it all. However, you could move to a state or district that doesn’t participate in Social Security; that would save you 6.2% right off the bat. When we moved to Echols County, our district did NOT contribute to S.S. It was nice to keep that money. Good luck. Ed

  15. Kris


    I am a newbie to the FI world and stumbled upon your blog via the ChooseFI podcast. I have read this post and the comments several times and still quite confused about the math behind free money, 10% money, etc. I know your due date for this homework was over a year ago, but as I enter the 2017 tax filing season, I am simply attempting to understand why my tax bill is what it is. Hoping you can help:

    -Married Filing Jointly
    -Four kids
    -Standard deduction (I tend to itemize, but for the purposes of understanding your math, I’ll happily accept the standard deduction)

    I read Maggie @ Northern Expenditure’s post (October 10, 2016 at 11:36 am), plus your reply. Understand she has three kids and I have four, but assumed it would be a simple substitution of 4 in place of 3 in your equation…

    I also read Nick’s and Rebecca’s posts near the bottom of this thread and your responses helped clear this up a little. Still, I am struggling to understand the basic concepts to begin with. Would you be willing to explain this…kindergartner-style?

    Btw, I calculated $51,233.33 in free money. And with four kids, I suppose I have “skipped” the 10% bracket like Nick and Rebecca, and therefore anything I have earned over $51,233.33 is taxed at the 15% rate? From here, do you apply other deductions (401K, IRA, etc.) to reduce my “15% money?”

    Hopefully you can see why my head hurts!

    Thanks! Gotta digets your Trump 2018 free money post now. Really appreciate your help!

    • Hello Kris,
      I have some good news for you: your 2017 Free Money! is $69,883 Here’s the breakdown:

      Standard Deduction: $12,700
      Personal Exemptions: 6 * $4,050 = $24,300
      Credits: 4 children = $4,000 in child tax credits resulting in $32,883 of income. You’re correct you blow past the 10% bracket of $18,650 (with a tax obligation of $1,865). After covering the 10% tax obligation, you still have $2,135 of credits which yield $14,233 (on top of the $18,650 of the 10% bracket).

      Any money beyond this amount will be in the 15% tax bracket (up to $75,900). As long as you keep you income below $69,883, you won’t owe any income tax for 2017. For example, if your household has a combined income of $100k and you and your spouse both contributed $18k ($36k total) to 401k plans, you would have total taxable income of $64k ($100k – $36k). Boom, no federal income tax owed!

      The good news for you is that your 2018 FM! amount will be $93,842. I hope my numbers helped. Best of luck and hammer on, Ed

      • Kris


        Thanks very much! After poking around your site and beating Excel into submission, I was finally able to reach the same numbers you have for 2017 and 2018. Exciting stuff!

        Thanks again!


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