Posted on 06/27/2004 8:24:33 PM PDT by Choose Ye This Day
Q: My husband and I need assistance figuring out the tax benefit, if any, if I stay home with our son. Currently, my husband makes $52,000. After 403(b) contributions, health insurance, etc., he brings home $49,000 after taxes.
I make $30,000 a year and have no health insurance benefits or retirement plan benefits at my current job. I have a flexible spending account, to which I contribute $5,000 for dependent care and $2,160 for health reimbursement, yearly.
Our child-care costs are $765 per month.
We would like to know how to figure how much I am actually bringing home after subtracting any additional taxes my working is causing, as well as day care. We currently itemize deductions on our tax return. We purchased a home in April 2003 and have a monthly payment of $1,380. We also have about $450 of student loan interest that we are able to write off in addition to day-care expenses over $5,000. Can you shed some light on this for us? -- E.B., by e-mail
A: Your real take-home pay probably doesn't amount to much. And over your lifetime, the deal you're getting is even worse.
But giving an exact figure would require some very precise calculations, and some of your information worries me. I doubt, for instance, that your husband makes $52,000 but has $49,000 in take-home pay.
Fortunately, we can make some reasonable estimates. We can concentrate on your income and work backward:
First, the employment tax takes 7.65 percent off the top of your income. That's $2,295. It gets you little or nothing in future retirement benefits since you can collect a benefit based on your husband's higher earnings record.
Second, since your income will be "taken off the top," your income taxes will decline by the marginal tax rate on the $25,000 of income available after the $5,000 dependent care payment to the flexible spending account. With the 25 percent tax bracket beginning at $58,100 this year and income below that taxed at 15 percent, I'll guess your average tax rate would be about 20 percent. That takes another $5,000 off the top.
The next step is to subtract the out-of-pocket money for child care that you'll no longer pay, about $9,180 a year.
Subtract those three figures and you have $13,525 "left" from your $30,000 job. Some of the dollars remaining go to the inevitable costs of getting to work, additional clothing, clothing care, work lunches, etc. You'll have to estimate those.
And don't forget the productivity gained by being a full-time at-home parent, managing your home and family. With only one earner's work schedule to deal with, you'll probably save a good deal of money on more meals at home and fewer meals out, etc. Unless you have a career that you love -- or have a phobia about becoming a "Leave It to Beaver" family -- having one full-time parent can do a lot for your family.
Laurence J. Kotlikoff, the Boston University economist who co-authored "The Coming Generational Storm: What You Need to Know about America's Economic Future" (MIT Press, $28) with me, examined this question in a generational accounting context last year. He found that the second worker in a couple faces a true lifetime tax rate that is devastatingly high.
One of the main reasons your lifetime tax rate is higher than your current out-of-pocket tax rate is what I mentioned earlier -- the second worker pays full employment taxes but gains little or nothing in retirement benefits. The question is covered in our book. You can find the actual study ("Does It Pay Both Spouses to Work?") on the National Center for Policy Analysis Web site at www.ncpa.org/pub (publication 260).
Finally, to ward off the inevitable accusations of sexism, let me note that the numbers work the same way in the 40 percent of families where women earn more than their husbands. It will work just as well for those who decide to become "Mr. Mom."
(Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: scott@scottburns.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.)
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that part about the irrelevance of the second earner's FICA payments never even occurred to me.
Yup. That's highway robbery (for both the lower-earning spouse and that spouse's employer) having to pay 7.65% for something that they may never use. (Not to mention something that probably won't even exist when some are ready to retire.)
I don't think you need that. You'll be okay.
Huh?
What struck me is how much my grocery bill went down when I quite work. Stop buying frozen dinner in a box and start making things from scratch saves a bundle.
The best part of being at home is you get to be a real wife and mom, the next best is all the money you are no longer sending to the government.
Amen to the "real wife and mom" comment. My wife has always been a stay-at-home full-time mom, and our kids have benefited greatly. Have we always had enough money to make ends meet? No, not always--but we probably wouldn't have on two incomes, either. Do we take fancy vacations and have lots of expensive things in our home? No, but those things aren't important. Our kids have a mom who is always there for them.
No success outside the home can make up for failure inside the home.
I've left the labor force twice. Both times I was amazed how well we got along on one income. My income put us in a higher tax bracket and caused many extra necessary and not so necessary expenses. Because I had the money, I enjoyed a daily newspaper, bagel and coffee in the morning, and lunch out. We went out for dinner frequently and bought a lot of convenience foods. I bought professional clothing and paid for dry cleaning. My car had much more costly wear and tear.
Because my children were in day care, I spent more taking them on weekend excursions and long vacations. I bought them many more toys than they ever used or appreciated. Much of my limited time was spent cleaning and putting away clothing and other belongings. Because I was stressed, my husband didn't dare ask me to help reduce his stress. We're all so much happier now, and haven't felt deprived.
Ah, how this stirs poignant memories! I used to be a thoroughly contented stay-at-home mom. I loved caring for my house and children and had no complaints. We did well on my husband's income, for he planned it that way. In fact, he recognized all these objections at the time we got married and pointed out that we would do much better financially if I were to stay home. It really was a joy. But those days are over; he is gone and I have had to go out into the work world, which has been a terrible strain on the children. Those of you who can stay home or who can persuade your wives to stay home are truly blessed.
Well, there was one upside to my story. My children became more independent (in good ways). I hope your kids will rise to the occasion for you.
I just mean that your question seemed to focus on money. I would be happy to give you the name and phone number of of a CPA friend of mine who can give you an exact answer to that. He doesn't even charge much. It's a relatively easy question, and he is very good.
But, the fact that you pose the question in the first place suggests to me -- amateur psychologist that I am -- that you already know what you *want* to do. You want to stay at home.
I'm all in favor of that. I believe you and your husband will find ways to make the financial part work. (That's assuming you haven't got yourselves over your heads in debt.)
People can do without a lot of the things they are accustomed to consuming. If you study every penny you spend, I'm willing to bet you can find ways to save quite a bit. Maybe even more than your current income.
It's actually kind of fun once you get into it. I've been there.
There is no harm in going to the park rather than to the movie theater. Or in barbecuing rather than going to a restaurant. We can wear out clothes or repair them. We can also get by with one car. There are lots of things we can do in that regard.
What we can't do is restore the time that should have been spent in the home.
This wasn't my question. I just posted the article. I already believe there should always be one stay-at-home parent. My wife has been the lucky one to be at home with the kids for the past 9 years. It's wonderful. As I mentioned in an earlier post, we don't have everything materially, but we have what's important.
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