Fun with taxes

Last year at tax time, I asked whether my wife and I should stay married. As I noted then, the tax code says ‘no’ – being married cost us lots of money in additional taxes.

This year’s question is whether or not my wife should keep working.

The numbers in this analysis are heavily rounded for simplicity and anonymity. Taxes are (by far) our largest expense, but next year (with two young children), childcare will be next.

We made a lot of money last year. We’re not quite in the top 1%, but we’re close, with income of roughly $325k. My wife made the larger share of that amount (57%).

For 2011, we’ll pay a lot of taxes (Federal and DC) – rough $115k. Our average tax rate is about 35%.

If my wife wasn’t working, I’d pay a total of about $25k in taxes, making my average tax rate about 18%. Put differently, my wife working raises our tax bill by about $90k.

Having two kids with a nanny or in daycare would cost us roughly $50k after taxes (a nanny is a bit more expensive and day care is a bit less). At an average tax rate of 35%, we have to earn something close to $80k (pre-tax) to pay for childcare.

Adding up the additional taxes (90k) and childcare costs (80k) you get $170k of income that goes away.

My wife would make more than that next year, but she has to work a lot to make that money. At a certain point, her hourly wage becomes ridiculous. Therefore, it looks like the answer to the question of whether or not she should work is ‘no’. Obviously, this is a subjective decision. We’d make more money (and save more for retirement) if she keeps working. The returns on her working are just very low, given the amount of time she has to spend working. It looks like, for us, the returns are not worth the time and energy. This is too bad for the government, the nanny that we won’t hire, and the guy who we’ve kept half-employed doing work on our house.

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31 Responses to Fun with taxes

  1. chucho says:

    It may get much worse, too. Next year all the Bush tax cuts are set to expire, pushing the top rate to 39.6%. Dividends are scheduled to be taxed at ordinary rates as well, instead of 15%.

    Plus, Obamacare is adding 0.9% Medicare tax to wages over 200k/250k married (I think), plus an additional interest/dividend tax for high earners of around 3%.

    Of course this is all up for grabs and will likely change before Jan 1st comes along. But the larger point (besides the insanity of our tax policy, inasmuch it changes every year now and makes it impossible to plan) is that many upper middle class people in DC and NYC are set to cross the 50% marginal tax rate barrier. They will become minority partners in their income and investments.

    • sardonic_sob says:

      And don’t forget the payroll tax going back up 2%, if they let it happen. I don’t see it, but it will be close.

  2. asdf says:

    I weep for you.

    Honestely, I think the primary problem here is childcare/education. The same conclusions often get reached by people irregardless of wierd tax stuff. Even if the tax rate stays stable, its so hard to justify a working wife if the husband makes six figures.

    I’m curious how you got to those changes in tax rates. Maybe I don’t see it because I’m single.

    How old are you guys BTW?

    • Foseti says:

      The tax rates are straight from the tax code. The AMT kicks in a big portion of the total bill when we both work. We’re 30/31.

      • asdf says:

        Havn’t dealt with AMT or anything before. Its amazing you make that much having never been anything but a civil servant and so young.

  3. Jehu says:

    Does she have the temperment to homeschool your little ones?

  4. Frost says:

    Maybe Dad could stay home and blog all day, or write a book?

    Bonus, you can home-school the Foseti Jr’s for a few years and see how much rabble a pair of reactionary high victorians can rouse in the public school system.

    • sardonic_sob says:

      Theoretically it’s worth considering for the lower-income partner to stay home, but our gracious host has a job with the Federal Government. Given the benefits and job security, my wife would have to outearn me way more than ~14% before I’d seriously consider me staying home and her continuing to work in that situation, especially when you do a comparison of hourly wages.

  5. aretae says:

    Foseti,

    Friends of mine have been chasing this dilemma for 20+ years.

    You’ve missed a bunch of the costs. Wife needs a professional car to go be a lawyer. Wife needs up-to-date lawyer clothes to be a lawyer. Wife needs XYZ,W,Q to go be a lawyer. What happened if 75% of that cost disappeared because she wasn’t working.

    As a financial decision, I think it’s probably a pretty serious win to bail on the working.

    As a decision, sans the finance, it’s much harder. Work is huge for the ego. And high income jobs as well. Your benefits are not included in your calculation, AFAICT, and they’re (nearly) completely unaffected by the decision.

    Stay-at-home mom is a huge change of direction for (almost) anyone. If you’re not someone who loves (loves loves) kids/babies, it’s a really hard transition, and the work-hedons from a job are probably worth the net financial cost.

    I wish y’all luck in making the decision.

    • ChevalierdeJohnstone says:

      This is a stupid response. I’m sorry if that seems rude; I’m not accusing the respondent of stupidity. Merely the omnipresent, idiotic idea that a stay-at-home wife has to love babies.

      Being a housewife does not mean cleaning and cooking and taking care of the kids. It can, if that’s what the couple chooses. But at its core, being a housewife means you do not go to work. Emphasis on Go to Work. There are an infinite number of productive and exciting things an adult human can do without going to someplace and sitting at a desk and doing…stuff…for a large part of the day in exchange for money. You can paint a masterpiece, compose a symphony, write a novel, grow a garden, build furniture, design software, solve mathematical proofs – anything, absolutely anything at all. Having a job is not required to have a vocation. In fact it is far easier to have a true vocation without a job. Having a job means having a boss, whether it’s management or your customers. Having a vocation without a job means you are free to do absolutely anything that you want. The singular reason to Go to Work is the money. Period. There is no other reason to hold down a job. The idea that anyone would go to the same place and do the same task day after day after day after day without being compensated financially is simply ludicrous. Now, certainly you may enjoy the work that you do. But that does not mean you enjoy your work. It means that you in fact do not feel that you work at all; what you enjoy is that you are fortunate to be able to do things that you would still do even if you were not paid to do them. The only reason to chain yourself to a contract that forces you to do the same activities is money. Getting paid is the only benefit of Going to Work. Period.

      Thus Fosetti and spouse have exactly the right attitude. The only reason a woman should Go to Work is that she has to, because she or her family need the money. Any argument for working which does not begin and end with money is inherently stupid.

      The appeal of being a housewife – and the civilizational value of monogomous marriage where only one partner works – is that the man Goes to Work doing a task which is valued by the marketplace in exchange for which he gets money. The woman stays home and does – anything.

      The absolute tragedy of our declining civilization is that throughout all of human history this happy partnership was impossible, except to a very, very wealthy elite. Everyone had to work or all would starve. At the exact civilizational moment that it became possible, technologically, for the majority of women to have the freedom to not Work but instead choose to do anything else out of the infinite possibility of exciting and important and valuable and productive things that it is possible to do while not working – women were sold the lie that it is not possible for a woman to find anything interesting to do with her time unless she goes somewhere and has someone tell her what to do.

      Modern feminism has been the worst thing to happen to women, ever. Always before a woman was free to dream of being free of oppression. Today a woman is taught to desire the oppression of Work; she is taught, in fact, that she has no intrinsic value as a person but is only important insofar as she has a “career”. A more unspeakably vile evil has never been concocted. Always before slaves have understood that they were oppressed and dreamed of being free.

  6. josh says:

    Childcare gets much cheaper when your kids enter preschool, and again when they enter school, if, like me, you swallowed your pride and moved to Falls Church. We’re number 4.

    http://www.northernvirginiamag.com/top-high-schools/

    Langley and McLean, must have really good teachers.

    One questions is, how hard would it be for your wife to take just a couple of years off.

  7. dearieme says:

    My wife took a few years out of the workforce for just that reason. Then when she was ready to return she got lumbered sequentially with ill people to look after, me and both her parents. There’s no telling what the future holds.

  8. j says:

    I’m in the same trap. Four years ago calculated my optimal work / net income equation, and my optimum was below average salary (in Israel it is about 8,000 shekel per month – 2,200 $). It appears that those “lazy” people with no ambition are, in fact, optimizing their life. Working above that income makes no sense.

    Yet I am working like a horse to pay more taxes.

  9. Fake Herzog says:

    Regardless of whether or not your wife plans on homeschooling, the benefit to the kids and to Mom of having Mom at home is enormous. They’ll turn out O.K. if she works, of course, but I think she should stay at home for at least a couple of years. My wife stayed at home for 10 years, but she wasn’t loving her job to begin with and she wasn’t making the big bucks like your wife, so it was an easy decision. She then became very involved at the local school and when the girls were old enough, has gone back to work part-time.

    I wish you all the best

  10. Bill says:

    This is why high marginal tax rates are such a good idea. They provide incentives for mom not to work outside the home. Obviously, it would be better for mom not to work outside the home because she and dad have their heads screwed on straight, but whatever.

  11. A Lady says:

    Your wife will still need childcare/staff if she is going to stay home with children under 5, so that expense doesn’t disappear just because she’s not working outside the home.

    • samsonsjawbone says:

      Your wife will still need childcare/staff if she is going to stay home with children under 5

      Eh?

      • A Lady says:

        It’s to some extent a class marker for Americans. Women of upper classes (or women from lower classes with strong family support) already know they need someone else to wrangle the little ones and keep the place tidy while they take care of themselves and the administration of the home. Being a housewife is also a job, and one that requires some staff to delegate tasks to in order to do optimally.

        Women in the middle classes think they can do it with no help and endure the frazzlement and strain partly because the cost of staff is prohibitive at sub-100k household income levels and family nearby is increasingly rare as the historical and cheap option for those not well off enough to pay for help.

        When men making a highish wage talk about all the money they aren’t going to spend bringing their high-income spouse home, it’s just slightly silly signalling behavior. The wife will still need household support staff, even for just one or two children (particularly once you get into multiple children). In the past, men were separated from this reality, but they certainly acknowledged its importance, while modern men, no matter how conservative/traditional they claim to be seem to not get it, at least on the internet. Offline the most conservative/traditional men at a range of income levels seem to understand and arrange or allow the wife to arrange for help, in my experience.

      • asdf says:

        I’m sorry, but anyone who can run a household on their own if that’s their only job is a lazy bitch. This doesn’t change even if you can afford help.

  12. A Lady says:

    That said, since you say you have 2 kids, an au pair is pretty easy to set up and cheaper than a high quality nanny with full pay and benefits (which would be more than any old 50k/yr). Although you could have the nanny for years instead of having to use a succession of au pairs.

  13. Do you ever feel like you’re working for the bad guys?

      • josh says:

        Well, they’re not the good guys. I don’t know what you do, but my father was a section chief at DOJ. He spent his career suing school districts because there was a disproportionate number of blacks in special ed. or being suspended. Maybe you don’t do anything that evil, but its still your team.

      • asdf says:

        Yeah, he should join team corporate america. Then he’d definately be doing some good for sure.

  14. samsonsjawbone says:

    The returns on her working are just very low, given the amount of time she has to spend working. It looks like, for us, the returns are not worth the time and energy.

    No apologies for my stance on all this! I think it’s fantastic whenever I hear about someone making the choice to abandon careerism in favour of family. (I realize you haven’t made a decision yet.)

    How I wish that people could be made to realize that money really, really isn’t everything. When our first two kids were young (both under two), my wife went back to work very casually (several days per month), because she thought she “missed her job” and wanted a little more adult contact. What she discovered was that she actually hated it – hated being away from the kids, hated having her house become a disaster area, hated juggling two big responsibilities (work, family) instead of only one. The kids hated it too, as reflected in their moodiness and poor behaviour. Finally, I hated it because the kids were moody, my wife was stressed, and our home was just not as nice a place to come back to after *I* had put in a hard day’s work. To me, the peace of mind our whole family enjoys is worth much more than whatever extra income we could earn if my wife worked.

  15. Agnello says:

    Foseti,
    There is another major benefit to consider – the average intelligence/education of nearly anyone other than your wife who might be involved in your children’s care/education,as compared to hers…The cost of hiring someone(individual or institutional) to mind your children full time, who is as qualified to do so as she is, should,logically, be expected to equal or exceed her pre-tax income.The only only reason this is not intuitive for us in twenty-first century America is a century of progressive propaganda…

  16. [...] – This pretty much settles it for me. [...]

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    [...]Fun with taxes « Foseti[...]…

  18. Asshole says:

    Someone else will just take your wife’s job when she quits. No worries!

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