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!
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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:
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:
Tax Bill of $1k, $2k, & $3k
- $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.
After Taxes
($45,083)
($52,416)
($59,750)
($67,083)
Final Thoughts
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!Yours in minimal taxes,
Gerry
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If you don’t have any children and file “Single, MFS, MFJ,” here’s your table:
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
22% bracket kicks in earlier than you have in your tables.
22% for incomes over $40,525 ($81,050 for married couples filing jointly);
Hi Peej,
Don’t forget to add the standard deduction to those amounts, right? What am I missing? G
Thanks for all this helpful info. I’m new to backwards engineering my tax liabilities and am a teacher in CA with around 10% required contributions. I know you’re not a tax accountant, but can you tell me if I’m understanding gvygese figures correctly? If I earn 100k and subtract my 10k pension contributions and maxed contributions to my 403b, 457 and HSA (100-10k calstrs-19.5k 403b -19.5k 457-5k FSA for childcare- 3.5k for HSA, does that effectively leave me with 42.5k in taxable income? If I’m MFJ with 3 dependents, do I have then $58,650 left to fill up my 10 and 12% buckets?
Thanks!
Your numbers look good to me. Are you planning a big Roth IRA conversion? Best of luck, GB
Always a good read
Thank you
Thanks Brian. This is one post that I have to write for my own tax plan. Thanks for visiting my site. GB
Hi Gerry, I look forward to this post every year!
Just remember individual taxpayers can claim an “above-the-line” deduction of up to $300 for cash donations made to charity during 2020.
And An eligible educator can deduct up to $250 of any unreimbursed business expenses for classroom materials, such as books, supplies, computers including related software and services or other equipment that the eligible educator uses in the classroom.
I found this post super cool and helpful. I even shared it with Mr. Into the Fire and he was so impressed he asked me to print out your chart. Thank you so much for posting!
This was a super helpful post! I tried to leave a comment thanking you for sharing this helpful information, but it marked my comment as spam 🙁 . Here goes this time! Happy New Year by the way!
Don’t forget the ‘above the line’ deduction for charitable cash contributions. The amount has been increased to $600 for a married couple in 2021.
Gotta look into this…thanks Joe! G
Ive read all of your “Free Money” posts, and I think I finally get it. I file single, and have a pre-tax salary of $55K. So If I theoretically wanted to stay in the 10% tax bracket, I’d have to contribute to HSA, retirement, health premiums to a total of $30,575?
I teach in private school, so don’t have access to 457, but I have 403b.
Lanie,
It looks like your 10% bracket ends at $22,500. The $30,575 is your 12% tax bracket. G
My previous attempted reply was marked as a certain canned meat. I’ve read all of your free money posts and think I have it figured out (my numbers match yours). So, as long as my taxable income is under 53,075 (single filer), I should have to pay no more than 4664 in federal tax? And If I want it lower, I just have to contribute pre-tax to HSA, retirement, etc? I am very new to this concept, but Ive been under that taxable income for years, but get an extra 2K taken out of my paychecks each year. Trying to adjust my W4 to prevent this.
Hi Lanie,
It appears that $53,075 is the end of your 12% bracket. Yes, you can make contributions to your tax-advantaged accounts if you’d like to keep you taxes in check. Sorry for the delay in getting back to you. G
Hello, new reader here. Are you guys not able to get the EIC credit? Investment income to high? Our taxable income is about the same and we get the EIC.
Hi Jen,
While we do drive our wages down considerably, we do have income that comes from 72t IRA distributions and 457 distributions (most years). That keeps us out of the EIC game. Oh well, using the EIC while having a 7-figure net worth might spark a revolt (a la Peter Thiel Roth IRA)!
Could you do an updated 2021 FM! Post accounting for the new child tax credit? I’m confused how it will affect taxes, if at all..
Working on it! GB
Ed, thanks for this. I look forward to it every year. Helps in planning. With the passing of the American Rescue Plan bill it looks like the increase in child tax credit means there is even more room in 2021. There will also be the extra tables needed to different under 6 and over 6. E.g.
MFJ1 under6, MFJ1 over6
MFJ2 under6, MFJ2 over6, MFJ2 1under6-1over6
MFJ3 under6, MFJ3 over6, MFJ3 1under6-2over6, MFJ3 2under6-1over6
Etc
Pat,
I’ve been thinking about how to present this new wrinkle. Thanks for reminding me to GET ON IT! Looks like those free money amounts are going to balloon. Thanks for reading. G
I love this post and am following the math pretty well (at least for a history teacher XD) but I am having trouble understanding how the remaining $10 credit from the remainder of the child-tax credit translates into $83 of savings). I’ve read and re-read that section of the post dozens of times and for the life of me I can’t get it right in my head. Would be grateful for any light you can shed on this!
Hi Daniel,
Here’s the math: $10 / .12 = $83.33. Don’t feel bad because tax math can be confusing to us non-CPA types. Sorry for the delay in getting back to you. GB