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We didn’t cut cable or our cell phones either.
Those are all great options for saving more of our income. But that is not how we are saving several thousand dollars in 2018.
We are putting over $3,000 back into our pockets … or rather our 457b plan … by optimizing our taxes.
Based on the current tax law, we anticipate paying $0 in federal taxes this year (2018). And based on the same tax law and careful planning … we won’t pay any federal taxes in 2019 either!
How is this possible you may be asking?
We simply use the tools available to us in the current tax code. And the first step is to calculate what is called – FREE Money.
How to Calculate Our 2019 FREE Money
The goal in this calculation is to figure out how much income we can earn without paying any federal taxes on it. Based on the results, our family can then take action to keep as much of our income as possible and put it to work building our net worth.
Just like in our calculation last year (2018), we need a couple pieces of information to get started on calculating our FREE Money –
- Filling Status – MFJ (Married Filing Jointly)
- # of Children – 3
My wife and I are a single income household with 3 children. We have always filed our taxes as Married Filing Jointly since we have been married.
Our first step in the FREE Money calculation is to find out the 2019 tax brackets that will impact our family.
2019 Tax Brackets
The 2019 tax brackets are out and there has been a slight increase in the income amounts. For more information on your specific tax bracket, check out the 2019 Tax Rates.
For our family, my wife and I file as Married Filing Jointly. These are the tax brackets that we are concerned with for 2019. Please note that your filing status and income levels may be much different than ours.
- 10% Tax Bracket – $0 to $19,400
- 12% Tax Bracket – $19,401 to $78,950
- 22% Tax Bracket – $78,951 to $168,400
Note – Keep in mind there are several other tax brackets past 22%. However, based on our current income levels … our family is really only concerned with the 10% and 12% brackets. However, there is a slight chance we could get close to the 22% bracket … which is why it is included in the list above.
Now that we know our different tax brackets … the next step is to figure out our deductions.
1. Standard Deduction
Up until this year (2018) … my wife and I would always take the itemized deduction on our tax return. Each year we pay property taxes on our home and interest on our mortgage. In addition, we typically donate a bunch of clothing (mostly children’s) and household items to local charity.
Combined these deductions were well above the old standard deduction (around $13,000 in 2017). But now with an increased standard deduction … it no longer makes sense to itemize.
So instead … we will take the $24,000 standard deduction for married couples filing jointly (MFJ) this year (2018). And it looks like we will take it again in 2019.
The standard deduction for married couples filing jointly went up by $400 for 2019 … so this is a good start towards earning more FREE Money.
2019 Standard Deduction = $24,400
What does this mean for our taxes?
It means that our first $24,400 of taxable income is exempt from any tax!
2. Personal Exemptions
Nothing to say here … except as of 2018 there are no personal exemptions any longer. That’s okay because the standard deduction (in our case) more than makes up for the personal exemption.
2019 Personal Exemptions = No Longer Used
Note – This is the last year I will even mention personal exemptions in these roundups since they went away last year.
3. Child Tax Credits
I always thought kids were expensive. I love my 3 kids more than anything … but they can get a bit pricey.
The one exception is when we file our taxes. Starting in 2018, the child tax credit doubled from $1,000 to $2,000 per kid.
And the good news is that $2,000 child tax credit remained the same for 2019!
So with 3 kids and the lower tax brackets (10% and 12%), that is a huge tax benefit.
Just like last year when we ran our free money calculations, we have to remember there are tiered tax brackets. For 2019, we only have to worry about the 10% bracket (up to $19,400) and the 12% bracket ($19,401 to $78,950) in our situation.
We are actually getting close to the 22% bracket ($78,951 to $168,400) … so I’ve included those ranges too. If our income rises by about $5,000 in 2019 … then we will need to start thinking about this bracket. For now, we are happy to live in the 10% and 12% brackets.
A quick reminder about the different tax brackets … any income we earn up to $19,400 will be taxed at 10% and all income we earn between $19,401 to $78,950 will be taxed at 12%. For our situation, we don’t have to worry about anything higher than that (for now).
So for every child that we have (which is 3) … the federal government now gives you a tax credit of $2,000! This means that the first $2,000 of taxes (at the 10% rate) can be wiped out with this credit. Our first credit actually covers the entire 10% bracket … pretty cool.
When I think about how these child tax credits impact our bottom line, I always get a bit confused. That is why I like to write it out so I can see the numbers working.
Here is how the child tax credits break down for our situation –
Credit #1 – $1,940 on the first $19,400 of income in the 10% bracket
The first credit of $2,000 covers the entire 10% bracket, plus a bit leftover in the 12% bracket. This is a great start!
Tax Free Income = $19,400
The good news is that we still have another $60 in credit that can be carried forward into the 12% bracket.
Credit #1 – $60 in the 12% bracket
The remaining $60 of our 1st child tax credit will help us get more free money in the next tax bracket at 12%. This is on the income we earn between $19,400 up to $78,950.
So with our remaining kid #1 tax credit, we now get an additional $500.00 of tax free income in the 12% bracket. We calculated this by – ($60 / .12) = $500.
Tax Free Income = $500.00
Now we can bring in our next two child tax credits which will fill up a bunch of the 12% tax bracket!
Credit #2 – $2,000 on the next $16,666.67 of income in the 12% bracket
Our second $2,000 credit in the 12% bracket will get us an additional $16,666.67 of tax free income based on this calculation – ($2,000 / .12) = $16,666.67.
Tax Free Income = $16,666.67
Credit #3 – $2,000 on the next $16,666.67 of income in the 12% bracket
Since we haven’t filled up the entire 12% tax bracket yet, our child tax credit #3 will be the same as #2.
Our third $2,000 credit in the 12% bracket will get us an additional $16,666.67 of tax free income based on this calculation – ($2,000 / .12) = $16,666.67.
Tax Free Income = $16,666.67
Total Child Tax Credits
After calculating each child tax credit, we can wipe out another $53,175 of income that won’t be taxed next year!
- Credit #1 – $19,900.00 of income ($19,400 + $500)
- Credit #2 – $16,666.67 of income
- Credit #3 – $16,666.67 of income
Child Tax Credits – $53,233.34
Just for a quick comparison, the old tax code back in 2017 gave us a child tax credit of $26,350. So as you can tell, the doubling of the child tax credit will have a huge benefit on our taxes this year (2018) and next (2019).
Our child tax credit FREE Money also goes up slightly in 2019 ($53,233) compared to 2018 ($53,175).
And this will more than make up for the elimination of the personal exemptions.
Our 2019 FREE Money
So now that we know where our deductions and credits will come from in 2019, we can easily calculate our income that won’t have any federal tax.
- Standard Deduction – $24,400
- Personal Exemptions – $0
- Child Tax Credit – $53,233
Total Tax Free Income 2019 – $77,633
Overall that is $458 of additional FREE Money we get to play with in 2019 compared to 2018 ($77,175).
Just like last year, I would suggest checking out the 2019 Free Money Tax Tables by The Millionaire Educator. If you are at all confused about how the credits and tax breaks impact your situation, these tax tables will really help you understand.
What Does This Mean?
So we now know that our total tax free money for 2019 has increased to $77,633.
But what does that really mean?
Well, it is actually very simple … our first $77,633 of adjusted gross income will not have any federal income tax!
Anything earned over that amount would be taxed. So if we were to earn $80,000 in adjusted gross income next year … we would pay 12% tax on anything up to $78,950, which would be the first $1,317 ($78,950 – $77,633). The remaining $1,050 of that $80,000 would be taxed in the next bracket (22%).
With careful planning, we can now tweak our adjusted gross income down enough to pay close to $0 in federal taxes for 2019!
This is where the real fun starts. We can adjust our pre-tax investments like our 457b and IRA accounts so we have less taxable income. And we cannot forget any extra side income we earn or our dividends and interest income that is rising every year.
That is why it is so important to calculate your FREE Money totals. Stay tuned for a future post on our plan to pay $0 to very little federal tax in 2019.
Have you calculated your FREE Money amount for 2019? I strongly suggest you calculate it out so you can maximize your taxes.