How to Calculate Your 2018 FREE Money

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I already know what you are thinking … there is no such thing as FREE Money. But when it comes to paying Federal Taxes … there actually is a way to get – FREE MONEY.

The free money that I am referring to is the income you are allowed to earn by the IRS … before you get taxed on it . This free money is 100% legal and is something you should not ignore.

Unfortunately, I have been ignoring this simple financial life hack for many years … until now.

If you are totally confused at this point … don’t worry … I was too. And to a certain extent, I get a little fuzzy still on some of the details and have to keep studying up on this topic.

For those who are completely new to this concept … I suggest checking out the following article by The Millionaire Educator – Tax Planning: 2018 Free Money. It is by far one of the best resources to understand this FREE Money concept.

How to Calculate Our 2018 Free Money

Hopefully by now you have a basic understanding of how to limit the federal taxes you are going to pay. Or even better … drop your federal taxes to $0.

So now I would like to go through a simple exercise of calculating my family’s 2018 Free Money.

Please keep in mind that by the time you read this information … it very likely could be outdated. With potential tax law changes coming, our free money calculation could change very soon. Despite this possibility … I still think it is a great exercise for everyone to go through to better understand how your income is being taxed.

So here we go …

For the purposes of finding our Free Money for next year, we need to pieces of information –

1. Filling Status – MFJ (Married Filing Jointly)
2. # of Children – 3

For those of us who are married and filing jointly with children … there is some good news. There are 3 main methods for reducing our federal income taxes, detailed below –

1. Standard (or Itemized) Deduction

First, we start off with a minimum standard deduction of $13,000. This of course assumes we are not itemizing our deductions … which on our 2016 taxes was $16,389. I always like to figure low on these types of things … so I will use the standard deduction to calculate our free money for 2018.

Note – Last year we had mortgage interest and taxes we could deduct … plus charitable donations. I expect 2017 we will likely itemize our deductions and probably the same in 2018. So for now, we will still use the $13K as a low estimate.

Standard Deduction – $13,000

2. Personal Exemptions

Our second deduction to calculate our free money is to take our exemptions … which next year will be $4,150 per dependent. So calculating this out … we will have exemptions of $20,750 for 5 people (me, my wife, and 3 kids).

We are on a roll so far!

Personal Exemptions – $20,750

3. Child Tax Credits

The next big deduction (and the most confusing part of figuring this all out) is our Child Tax Credits for 3 kiddos. This is where the math gets a little confusing, but if you break it down … it isn’t that hard.

Before we get too far with this … remember that we have different tiered tax brackets. In our case, we are only worried about the 10% and 15% brackets. For 2018, the 10% bracket ends at $19,050.

So any income we earn up to $19.050 will be taxed at 10%. Anything above that (up to $77,400) will be taxed at 15%. Here is a good recap of the proposed 2018 tax brackets. Of course, all of this could change with any new tax laws that could be passed soon.

Now back to the Child Tax Credits … for every child that you have (we have 3) … the federal government gives you a tax credit of $1,000. This means that the first $1,000 of taxes (at the 10% rate) can be wiped out with this credit. Another way to look at this is that the first $10,000 of income earned (out of the $19,050 10% limit) is tax free!

Since we have 3 kids and 3 Child Tax credits, we have do figure this out … and no … it isn’t simply $30,000 (which is where I first got confused).

Here is how the child tax credits break down for our situation –

Credit #1 – $1,000 on the first $10,000 of income
The first credit in the 10% bracket is simple. Our first $10,000 in the 10% bracket is tax free. Since the 10% income limit is $19,050 for next year, we have $9,050 of potential income remaining in this bucket.

Tax Free Income – $10,000

That is where child tax credit #2 comes in …

Credit #2 – $905 credit on the remaining $9,050 of income in the 10% bracket
So with child #2, we have finished off the 10% bracket with $9,050 of additional tax free income. Remember that we will still have $95 worth of child tax credit not used in the 10% bracket that will carry into the 15% bracket.

Tax Free Income – $9,050

Confusing I know … but stay with me …

Credit #2 – $95 credit in the 15% bracket
Our next $95 of child tax credit will come from the 15% bracket … which is income earned between $19,050 up to $77,400.

So with kiddo #2, we now get an an additional $633.33 of tax free income in the 15% bracket. We calculated this by – ($95 / .15) = $633.33.

Tax Free Income – $633.33

Credit #3 – $1,000 credit in the 15% bracket

Okay, our last child tax credit will be completely in the 15% bracket … so our calculation gets easier again.

Our last $1,000 credit is in the 15% bracket, so we get an additional $6,666.67 of tax free income from this bucket.

Tax Free Income – $6,666.67

Total Child Tax Credits
After calculating each child tax credit, we can wipe out another $26,350 of income that won’t be taxed next year!

• Credit #1 – $10,000 of income
• Credit #2 – $9,683.33 of income
• Credit #3 – $6,666.67 of income

Child Tax Credits – $26,350

Our 2018 FREE Money

So now that we know where our deductions and credits will come from in 2018, we can easily calculate our income that won’t have any federal tax.

• Standard Deduction – $13,000
• Personal Exemptions – $20,750
• Child Tax Credit – $26,350

Total Tax Free Income 2018 – $60,100

If you don’t want to calculate your own … it is all done for you on the 2018 Free Money Tax Tables by The Millionaire Educator.

What Does This Mean?

Okay great, we figured out our total tax free money for 2018 is $60,100 … but what does this mean?

It is actually very simple … our first $60,100 of adjusted gross income will not have any federal income tax. How crazy is that? Anything we earn over that amount will be taxed.

So if our adjusted gross income for 2018 was $70,100 … we would pay taxes on $10,000 (in the 15% bracket). And that is basically what we have been doing for the past couple years without even knowing it.

What is even crazier is that with some careful planning … we “could” reduce our adjusted gross income by enough to pay $0 federal tax!

Stay tuned for a future post on our plan to pay $0 to very little federal tax in 2018.

Note – Of course I will say it again … all of this could change with any new tax laws that may go into effect for the new year.

What is your FREE Money amount for 2018? I strongly suggest you calculate it out so you can maximize your taxes.