Tax Planning: 2023 Free Money!!

Tax Planning: 2023 Free Money!!

One of my favorite podcast episodes is from Choose FI, episode 13. As an educator, the millionaire educator aka Gerry Born, spoke to me. I worked hard to open up a 457b after listening to this episode. You can read about my difficulties with this task here.

Gerry Born would write a blog article I would anticipate and wait excitedly for every year, called Tax Planning: 20xx Free Money!. This year, I’ve been waiting and it hasn’t appeared. I speculate, but Gerry recently retired and it may be possible he is busier in retirement than before, or at least priorities have changed. So, I thought I’d take up the torch and write the article I reference and send folks to through out the year. *update – before I finished writing and publishing this article Gerry wrote and published his article. *

I try and come really close to what I owe in taxes and what I have prepaid out of my checks. The power in this tax planning, for me, is I can choose how much my tax bill liability to the government is by utilizing pretax vehicles, notably IRA’s, HSA’s, 403b’s and 457b’s. The current tax brackets for 2023 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. I feel pretty good if I can get all my taxed money in the 22% or below tax brackets, by using pretax buckets. Here is a great video to understand graduated tax brackets.

In the last couple years, my family budget has ranged between $82K and $89K. Prior to paying off our mortgage and a vehicle payment and with vacations, and two full time workers, our budget fell between $121-$128k/year. Expenses change and it is important to evaluate your costs periodically. I have two kids and a spouse. For this exercise, we will take the standard deduction for 2023 for a married couple filing jointly, $27,700. Each child is a $2000 tax credit. Credits offset the taxes you owe, dollar for dollar. Deductions reduce your taxable income. To read more on the differences between credits and deductions, check out this article. I am estimating we will have $118,940 in taxable income this year.

How much would we pay in taxes on a $118,940 income? Taking the standard deduction would reduce our income by $27,700, yielding $91,240. From the $0 to $22,000 earnings, we pay 10% in taxes, or $2,200. In the 12% tax bracket from $22,001 to $89,450, we pay 12% in taxes or $8,093.99. The remainder of our income is in the 22% tax bracket, and we would pay $393.58. This comes out to a total tax bill of $2,200 + $8,093.99 + $393.58 = $10,687.57. But wait, there’s more. I have two children (note: the child tax credit is not a good enough reason to have children, they can be expensive. Consider this a bone thrown to parents.) and each child has a tax credit of $2,000. My taxes of $10,687.57 is reduced by $4,000 ($2,000 x 2) and my liability to the federal US government for 2023 is estimated at $6,687.57. This is an effective overall tax of 5.6%! This does not take in to account state income taxes.

With this estimate in hand I can check the amounts of taxes taken out of my paychecks and make sure I am on track to having just the right amount taken out for the rest of the year. If I am off, I would contact Payroll at my employer to adjust the taxes taken out of each paycheck.

Using the math of the Millionaire Educator, the Free Money Amount for 2023 for married filing jointly with two kids is $27,700(standard deduction) plus $22,000 ($2,200 / 0.10) plus $15,000 ($1,800 / 0.12), totaling $64,700. If I had a total taxable income of $64,700 for my family, we would pay $0 in federal income tax. (This is simplified and there are other factors for an individual’s situation.). In my case, we spend more than that Free Money Amount, so I will be paying taxes, which I am happy to do, as many of the items I enjoy, like roads, utilities, public school, are partially paid by these dollars. Some of the other factors in my situation are real estate depreciation (see my post on this first real estate property) and pre tax vehicles. This year I will be putting money in an HSA, which is called the triple tax advantage. I and my employer contribute 15% of my salary to a 401a plan. These two items reduce my taxable income. Our family also recently changed to a one income family, which has also changed our income. We strive to max out our Roth IRA’s, which is after tax money now, and grows tax free for the future. Use the tables below to find your free money situation for the 2023 tax year,

Enjoy the year!

Sarah O. Sahara

2023 Free Money for: Single & MFS MFJ
Standard Deduction $13,850 $27,700
Credits $0 $0
Total Free Money $13,850 $27,700
Remaining 10% Bracket $11,000 $22,000
Free Money + 10% $24,850 $49,700
Tax Owed $1,100 $2,200
Effective Tax Rate 4.43% 4.43%

Effective tax rate of 4.43% with the entire 12% bracket remaining!

Remaining 12% Bracket $33,725 (Single & MFS) $67,450 (MFJ)
Free Money + 10% + 12% Brackets $58,575 $117,150
Tax Owed $5,147 $10,294
Effective Tax Rate 8.79% 8.79%

Effective tax rate of 8.79% at the end of the 12% tax bracket.

Here’s your table if you have children and file “MFJ“:

MFJ + Children: +1 +2 +3 +4 +5
Standard Deduction: $27,700 $27,700 $27,700 $27,700 $27,700
Credits: $20,000 $37,000 $53,667 $70,333 $87,000
Total Free Money $47,700 $64,700 $81,367 $98,033 $114,700
Remaining 10% Bracket $2000 $0 $0 $0 $0
Free Money + 10% $49,700 $64,700 $81,367 $98,033 $114,700
Tax Owed $200 $0 $0 $0 $0
Effective Tax Rate 0.4% 0% 0% 0% 0%

Effective tax rates of 0% to 0.4% with some room available in the 12% tax bracket.

Remaining 12% Bracket $67,450 (+1) $52,450 (+2) $35,783 (+3) $19,117(+4) $2,450 (+5)
Free Money + 10% + 12% Brackets $117,150 $117,150 $117,150 $117,150 $117,150
Tax Owed $8,294 $6,294 $4,294 $2294 $294
Effective Tax Rate 7.07% 5.37% 3.67% 1.96% 0.25%

Effective tax rates of 0.25% to 7.07% for a six-figure income!

For “Head of Household“, here’s your table:

HH + Children: +1 +2 +3 +4 +5
Standard Deduction $20,800 $20,800 $20,800 $20,800 $20,800
Credits $19,283 $35,950 $52,617 $64,995 $74,086
Total Free Money $40,083 $56,750 $73,417 $85,795 $94,886
Remaining 10% Bracket $0 $0 $0 $0 $0
Free Money + 10% $40,083 $56,750 $73,417 $85,795 $94,886
Tax Owed $0 $0 $0 $0 $0
Effective Tax Rate 0% 0% 0% 0% 0%

Effective tax rates of 0% with some room available in the 12% tax bracket.

Remaining 12% Bracket $40,567 (+1) $23,900 (+2) $7,233 (+3) $0 (+4) $0 (+5)
Free Money + 10% + 12% Brackets $80,650 $80,650 $80,650 $85,795 $94,886
Tax Owed $4,868 $2,868 $868 $0 $0
Effective Tax Rate 6.04% 3.56% 1.08 0% 0%

Effective tax rates of 0% to 6.04% for $80k (or more) of income!

SOS

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