Long-overdue greetings to all my readers out there. With 2021 right around the corner, it’s a perfect time to start your tax planning for next year. You know what means, right? Yeap, it’s time for my most requested post of the year, 2021 Free Money!
Here are the referral links for the credit cards we currently use:
What Exactly Is Free Money! ?
My “Free Money!” posts are a yearly attempt to provide my readers with some basic tax-planning information, the amount of income they can earn before they owe any federal income tax. My calculations are pretty basic and consist of two components: 1.) the standard deduction and 2.) the child tax credit. Explained another way, “Free Money!” represents the amount of income you can earn at a 0% tax rate. (Remember, that’s your federal income tax rate, not your state or FICA tax rate.)
Before we get too deep into this post, you should know…
Newsflash: I’m No Tax Expert
Okay readers, it’s time for me to cover my derriere. First, this post is intended to provide you with a basic income-tax estimate for 2021; please do not consider this personalized tax advice. Second, as I say every year, I am NOT a CPA, accountant, or tax preparer. I’m a high school teacher and coach who is simply trying to keep his tax obligation in check. Be wise and read this post with a skeptical eye.
2021 Free Money! Basics
As I just mentioned, most people’s Free Money! amount consists of two components:
the standard deduction + the child-tax credit
The standard deduction depends on the individual’s filing status. In 2021 the standard deduction will be: $12,550 for single filers, $25,100 for joint filers, and $18,800 for head-of-household filers.
In 2021, the child tax credit will continue to be $2,000 per child. Determining the FM! amount derived from the child-tax credit can be confusing. (Don’t despair, I’ve done the calculations for you in the tables below.)
Example: Our 2021 Free Money!
Okay, it’s time to do some tax math! First, I need to know what our standard deduction will be for 2021. This is no great mystery, here it is:
standard deduction = $25,100
Next, I need to know how much FM! our child-tax credit will provide. Our $2k child-tax credit will cover any tax obligation that we’ll have in the 10% tax bracket. ($19,900 * 10% = $1,990) Since we’ll still have $10 of credit left ($2,000 – $1,990), we’ll have $83 of FM! in the 12% tax bracket. (For anyone wondering: $10 / .12 = $83) In total, our child-tax credit provides an additional $19,983 of tax-free income.
child-tax credit = $19,983 ($19,900 + $83)
To calculate our total 2021 Free Money!, we simply add the previous two amounts together.
$25,100 + $19,983 = $45,083 of Free Money!
Simply put, our family of three can earn over $45k a year before we have to pay any federal income tax. Any income beyond that amount will be in the 12% tax bracket (all the way up to $106,150).
Our 2021 FM! vs 2020 FM!
Now, let’s compare 2021 FM! number with last year’s FM! amount:
Great news, it looks like we’ll have an additional $325 of FM! in 2021. That should help keep us in groceries for three or four weeks.
3 Income Scenarios in the 12% Tax Bracket
As soon as we know our FM! amount, we can decide how much more income we’ll take in the 12% tax bracket. For simplicity’s sake, let’s look at three different tax-bill amounts: $1k, $2k, and $3k:
Tax Bill of $1k, $2k, & $3k
Infinite Confusion Alert! For whatever reason, many people get confused with this part of the tax math. Fortunately, it’s a pretty simple calculation, so take a deep breath and relax. When you pass your FM! amount, you divide your desired tax bill by .12 and here’s what you get:
- $1,000 / .12 = $8,333
- $2,000 / .12 = $16,667
- $3,000 / .12 = $25,000
Now, that wasn’t so bad, was it? Once you know how much you’ll pay in taxes at varying income amounts, you can then make informed tax decisions.
The beauty of basic tax planning is that April 15th becomes just another day on the calendar while many of your family, friends, and neighbors view the day with blood-boiling anger. Remember that for the most part, YOU control your tax bill.
I have to say that it blows my mind that if our income is:
- $45,083, our effective tax rate is 0%.
- $53,416, our effective tax rate is 1.87%.
- $61,750, our effective tax rate is 3.24%.
- $70,083, our effective tax rate is 4.28%.
Now do see the importance of tax planning?
2021 Income Options
Here’s a look at our 2021 income options:
It appears that we’ll have some great income options in 2021. On the low end, we could live on $45k a year and pay $0 in taxes. That’s more than $3,700 a month!
On the high end, we could live on $70k a year and pay only $3k in taxes. That’s almost $5,600 a month!
Keep in mind that we live in Statenville, Georgia where the cost of living is low. Plus, at this point in the FIRE game our frugality muscles are pretty strong, so we can live well on either income amount.
I hope this post helps you understand that with a little planning, your income taxes can be held in check. Your tax bill shouldn’t keep you awake at night, it shouldn’t ruin the month of April, and it certainly shouldn’t be a surprise when it’s time to pay it. Your tax bill should be predictable and it should be as modest as you want it.
If you find this tax math confusing and frustrating, please check out the 2021 Free Money! tax tables below. Please double check my numbers and let me know of any errors. Like I said, I’m no tax expert. Best of luck in minimizing your taxes and building wealth in 2021!
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If you have children and file “MFJ,” here’s your table:
+ 12% Brackets
If you file “Head of Household,” here’s your table:
+ 12% Brackets
If you have children and file “Married Filing Separately,” here’s your table:
+ 12% Brackets