October is my favorite time of the year. While cooler temperatures, autumn leaves, and pumpkins are great, they don’t compare with my favorite aspect of fall–tax planning! Every year Forbes magazine comes out with its tax predictions for the upcoming year. Well, it’s here, so I can finally prepare our tax plan for 2017.
As my loyal readers already know (Hi Mom, Penny, and Landon!), tax planning is an integral step to our wealth-building. By keeping our federal income tax obligations in check, we are essentially able to set our own tax rate. Let’s face a few facts: 1.) no one likes to pay “too much” in taxes. At the same time, 2.) no one likes to listen to people whine about how much they paid in taxes, especially when much of the taxation could have been avoided with ten minutes of tax planning. If you are thinking you’re paying too much in taxes, keep reading and you’ll learn how to better control your taxes. At a minimum, you will be able to make informed decisions regarding your federal income taxes.
As you plan your taxes, the first number you need to determine is your “free money” amount. Free money refers to the amount of income that the government allows you earn before you have to pay any federal income tax. Your free money consists of three components: the standard deduction + personal exemptions + tax credits. Since our family consists of three people, we use the standard deduction of $12,700 and three personal exemptions at $4,050 each. Our standard deduction and personal exemptions total $24,850 of tax-free income.
But wait, we still have a child tax credit of $1,000 which further increases our free money amount. Since the first tax bracket taxes money at a rate of 10% , our child tax credit allows us to earn another $10,000 of tax-free income. ($1,000 / .10 = $10,000; remember, a tax credit simply cancels a tax obligation.) This means that for 2017 we can earn $34,850 before we owe any federal income tax. Click here to see which tax credits you might qualify for. Visual learners, check out my fascinating tax math in the chart below:
|Standard Deduction: Married Filing Jointly||$12,700|
|Personal Exemptions: ($4,050 * 3)||$12,150|
|Credits: (1 Child Tax Credit of $1,000 / .10)||$10,000|
|2017 Total Free Money||$34,850|
The next number you have to determine as you do your tax planning is your “10% money.” This number represents the amount of income that you can earn at the federal income tax rate of 10%. As the Forbes articles shows, the 10% tax bracket for a joint return is $18,650. However, in our case our 10% money is reduced by $10,000 due to our child tax credit of $1,000. The good news is that we can still access $8,650 of income at the 10% tax rate ($18,650 – $10,000 = $8,650). On this $8,650 of income we would owe a measly $865 in federal income tax. The total of our free money and 10% money is $43,500 with an effective tax rate of 1.99% ($865/$43,500)! Check my numbers below:
Our 2017 Income Options
Once you know your free money and 10% money amounts, you can decide how much income you’ll take in 2017. Everyone’s tax pain threshold is different, so you’ll have to decide for yourself. In our case, we try to never enter into the 15% tax bracket–that’s too rich for our blood! Does that mean we live in a cardboard box and eat cat food? Heck no, our monthly income options range from $2,904 to $3,553. While that’s not a lot of money in many parts of the globe, it’s plenty of money in our world: Georgia, Tennessee, Mexico, and Brazil*. Here’s a look at our income possibilities:
|2017 Income Options||Month||Week||Day|
|$34,850 with $0 Tax||$2,904||$670||$95|
|$43,500 - $865 of Tax||$3,553||$820||$117|
At risk of sounding like a broken record (how’s that for a dated reference…ask your parents youngsters), I cannot repeat the following enough: you have to understand how your income impacts your taxes. If you simply take your income with zero tax planning, you are flying blind and letting the government dictate your tax rate to you. A little basic tax planning will put YOU in charge of YOUR money, not Uncle Sam.
Okay students, I’m tired of lecturing, so it’s time for you to do some work. I need you to figure out your free money, 10% money, and anticipated effective tax rates for 2017. Please post your figures in the comment section below. Anyone receiving full credit on this assignment will be entitled to two high-fives and a bear hug at FinCon 2017 in Dallas. No cheating will be tolerated (I’m watching you!) and all answers must be submitted before December 31, 2016.
* We’re planning on a trip to Mexico in October, and we’re hoping to travel to Brazil sometime in 2017. Stay tuned…
|Health Savings Account: We use Elements Financial to access commission-free, low-cost Vanguard ETFs at TD Ameritrade.