2017 Free Money!


Boogie Boarding Fun

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:

2017 Free Money!
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
Effective Tax Rate of 0%!


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:

2017 Free Money + 10% Money
Free Money $34,850
10% Money $8,650
Total Money$43,500
2017 Federal Income Tax Obligation of $865
Effective Tax Rate of 1.99% ($865 / $43,500)

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 MonthWeekDay
$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.

Your Homework

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 money10% 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…




    • 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.

    • 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++

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