2022 Tax Minimization

Tax Planning: 2022 Free Money!

Greetings to all my current and future millionaire readers!  I’ve been meaning to write this 2022 Free Money! post for months now, but there has been one major impediment:  D.C. politics.

In March of 2021, the American Rescue Act increased the child-tax credit to $3,000 for children (ages 6 to 17) and $3,600 for kids under the age of six.  However, it appears that those child-tax-credit increases will not be extended since the Build Back Better Act of 2022 has not been approved.

What does this mean for us?  Unfortunately, it looks like the child-tax credit will revert back to its previous amount of $2,000.  Boo hiss!    

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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 Still No Tax Expert

Okay readers, it’s time for me to cover my tail.  First, this post is intended to provide you with a basic income-tax estimate for 2022; 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 “retired” high school teacher and coach who is simply trying to keep his tax obligation in check.  Be wise and read this post with a critical eye. 

Mercado time in Querétaro, Mexico!

2022 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:  $12,950 for single filers, $25,900 for joint filers, and $19,400 for head-of-household filers.

In 2022, the child-tax credit will once again be $2,000 per child; that’s a $1,000 to $1,600 decrease from 2021.  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 2022 Free Money!

Okay, it’s time to do some tax math!  First, I need to know what our standard deduction will be for 2022.  This is no great mystery, here it is:

standard deduction = $25,900

Next, I need to know how much FM! our child-tax credit will provide.  In 2022 the 10% tax bracket will be $20,550 for MFJ taxpayers.  So, our $2k child-tax credit will allow us to earn $20,000 without owing any federal income tax.  Here’s the calculation:  ($2,000 / .10).  This year is unusual since our child-tax credit will not completely cover the 10% bracket ($20,550 – $20,000 = $550 of space left.  (Don’t worry we’ll look at this remaining 10% bracket in the income section.)  Here’s the income value of our child-tax credit:

child-tax credit = $20,000

To calculate our total 2022 Free Money!, we simply add the previous two amounts together.

 $25,900 + $20,000 = $45,900 of Free Money! 

Simply put, our family of three can earn almost $46k 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 $109,450).

Our 2022 FM! vs 2021 FM!

Now, let’s compare 2022 FM! number with last year’s FM! amount:

Free Money! Comparison: 2022 vs. 2021
2022 FM!
2021 FM!
MFJ Standard Deduction
$25,900
$25,100
1 Child-Tax Credit
$20,000
$28,371
Total Free Money Amounts
$45,900
$53,417
A 2022 Free Money! Decrease of $7,517...YIKES!

Devastating news, it looks like we’ll lose $7,517 of FM! in 2022.  This decrease in the FM! amount is due to the decrease in the child-tax credit from $3k (or $3.6k) back to $2k.  Before you fall into a deep depression, let’s see what our income options are for 2022.

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.  Before we calculate our tax liability in the 12% tax bracket, we need to figure out our tax bill for the remaining 10% tax bracket ($550, see above).  Fortunately, this math is simple:  ($550 * .10 = $55). 

In other words, MFJ taxpayer with one child will owe $55 when their income reaches the end of the 10% tax bracket.  (This only applies for MJF with 1 child!) 

Let’s keep this simple and look at three different tax-bill amounts:  $1k, $2k, and $3k:  

2022 Income with
Tax Bill of $1k, $2k, & $3k
$1k Tax Bill
$2k Tax Bill
$3k Tax Bill
2022 Free Money!
$45,900
$45,900
$45,900
Remaining 10% Money
$550
$550
$550
12% Money
$7,875
$16,208
$24,542
Total Income
$54,325
$62,658
$70,992
- Tax Owed
-$1,000
-$2,000
-$3,000
Total After-tax Income
$53,325
$60,658
$67,992
Effective Tax Rate
1.84%
3.19%
4.23%
Remember, YOU Decide How Much You'll Pay in Taxes!

Infinite Confusion Alert!  For whatever reason, many people get confused with this part of the tax math.  This year it’s especially confusing thanks the $55 of tax to clear the 10% bracket.  (Keep in mind, that this is the case for MFJ with 1 child this year!) 

Fortunately, it’s a pretty simple calculation, so take a deep breath and relax.  First, subtract the $55 from our desired tax bill.  Second, divide the remaining amount by .12.   Here’s what 12% income with tax bills of $1k, $2k, and $3k looks like:

  • ($1,000 – $55) / .12 = $7,875
  • ($2,000 – $55) / .12 = $16,208
  • ($3,000 – $55) / .12 = $24,542

I hope that wasn’t too confusing.  This year’s extra bit of confusion was due to the shrinking credit ($2k) and the expanding 10% tax bracket ($20,550).  Just remember that these calculations allow us to make informed tax decisions at varying income amounts.

With a little tax planning we can make April 15th just another beautiful spring day while many of your family, friends, and neighbors howl at the moon.  As I write every year:  remember that for the most part, YOU control your tax bill!

It amazes me that if our income is:

  • $45,900, our effective tax rate is 0%
  • $54,325, our effective tax rate is 1.84%
  • $62,658, our effective tax rate is 3.19%.
  • $70,992, our effective tax rate is 4.23%.

And people think tax planning isn’t sexy!  Now do you see the importance of tax planning?  

2022 Income Options

Here’s a look at our 2022 income options:

2022 Income Options
After Taxes
Tax Bill of $0
($45,900)
Tax Bill of $1k
($53,325)
Tax Bill of $2k
($60,658)
Tax Bill of $3k
($67,992)
Month
$3,825
$4,527
$5,221
$5,916
Week
$883
$1,045
$1,205
$1,365
Day
$126
$149
$172
$195
More Than $3.8k a Month No Matter How You Slice It!

It appears that we’ll have some great income options in 2022.  On the low end, we could live on $45,900 a year and pay $0 in taxes.  That’s more than $3,800 a month! 

On the high end, we could live on $70,992 a year and pay only $3k in taxes.  That’s more than $5,900 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. 

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 2022 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 2022!

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:

2022 Free Money for:
Single & MFS
MFJ
Standard Deduction
$12,950
$25,900
Credits
$0
$0
Total Free Money
$12,950
$25,900
Remaining 10% Bracket
$10,275
$20,550
Free Money + 10%
$23,225
$46,450
Tax Owed
$1,028
$2,055
Effective Tax Rate
4.42%
4.42%
Effective tax rate of 4.42% with the entire 12% bracket remaining!
Remaining 12% Bracket
$31,500
$63,000
Free Money + 10% + 12% Brackets
$54,725
$109,450
Tax Owed
$4,808
$9,615
Effective Tax Rate
8.78%
8.78%
Effective tax rate of 8.78% at the end of the 12% tax bracket.

If you have children and file “MFJ,” here’s your table:

MFJ + Children:
+ 1
+ 2
+ 3
+ 4
+ 5
Standard Deduction
$25,900
$25,900
$25,900
$25,900
$25,900
Credits
$20,000
$36,758
$53,425
$70,092
$85,300
Total Free Money
$45,900
$62,658
$79,325
$95,992
$111,200
Remaining 10% Bracket
$550
$0
$0
$0
$0
Free Money + 10%
$46,450
$62,658
$79,325
$95,992
$111,200
Tax Owed
$55
$0
$0
$0
$0
Effective Tax Rate
0.12%
0%
0%
0%
0%
Effective tax rate of 0% to 0.12% with some room available in the 12% tax bracket.
Remaining 12% Bracket
$63,550
$46,792
$30,125
$13,458
$0
Free Money + 10%
+ 12% Brackets
$109,450
$109,450
$109,450
$109,450
$111,200
Tax Owed
$7,681
$5,615
$3,615
$1,615
$0
Effective Tax Rate
7.02%
5.13%
3.30%
1.48%
0%
Effective tax rates of 0% to 7% for six-figure income!

If you file “Head of Household,” here’s your table:

HH + Children:
+ 1
+ 2
+ 3
+ 4
+ 5
Standard Deduction
$19,400
$19,400
$19,400
$19,400
$19,400
Credits
$19,108
$35,775
$52,442
$63,105
$72,195
Total Free Money
$38,508
$55,175
$71,842
$82,505
$91,595
Remaining 10% Bracket
Child tax credit of $2k per child covers the entire 10% bracket!
Free Money + 10%
$38,508
$55,175
$71,842
$82,505
$91,595
Tax Owed
$0
$0
$0
$0
$0
Effective Tax Rate
0%
0%
0%
0%
0%
Effective tax rate of 0% with some room available in the 12% tax bracket.
Remaining 12% Bracket
$35,092
$18,425
$1,758
$0
$0
Free Money + 10%
+ 12% Brackets
$73,600
$73,600
$73,600
$82,505
$91,595
Tax Owed
$4,211
$2,211
$211
$0
$0
Effective Tax Rate
5.72%
3.00%
0.29%
0%
0%
Effective tax rate of 0% to 6% for $73k (or more) of income!

If you have children and file “Married Filing Separately,” here’s your table:

MFS + Children:
+ 1
+ 2
+ 3
+ 4
+ 5
Standard Deduction
$12,950
$12,950
$12,950
$12,950
$12,950
Credits
$18,375
$35,042
$47,193
$56,284
$65,375
Total Free Money
$31,325
$47,992
$60,143
$69,234
$78,325
Remaining 10% Bracket
Child Tax Credit of $2k per child covers the entire 10% bracket!
Free Money + 10%
$31,325
$47,992
$60,143
$69,234
$78,325
Tax Owed
$0
$0
$0
$0
$0
Effective Tax Rate
0%
0%
0%
0%
0%
Effective tax rate of 0% with some room available in the 12% tax bracket.
Remaining 12% Bracket
$10,450
$0
$0
$0
$0
Free Money + 10%
+ 12% Brackets
$41,775
$47,992
$60,143
$69,234
$78,325
Tax Owed
$1,254
$0
$0
$0
$0
Effective Tax Rate
3.00%
0%
0%
0%
0%
Effective tax rate of 0% to 3% for $41k (or more) of income!

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This Post Has 5 Comments

    1. Hi Silentnestor,
      The tables do not reflect any tax-advantaged accounts like IRAs, 401k-403b0457 plans, or HSAs. Since we use a HDHP, we use our HSA to drive our taxable income down. GB

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