A coworker claims that his wife stopped working because her relatively low earnings had no net effect on their household income. In other words, all of the money she brought in was taken in taxes and they take home exactly as much money now as when she worked. Something about going into a higher tax bracket. My understanding is that income tax brackets don’t work that way. Both live in the US, in a no income tax state, and are way too young for social security to come into the equation. He is well paid, probably $150-200k, and based on her degree, I doubt she made more than $30k. To be clear, he claims he did not get a raise or anything like that.
I think it’s BS; she doesnt work for other reasons entirely and he gets to complain about the government. He claims that they “did the math”, which in my experience usually means “math scares me, so I did whatever I felt like”.
Good people, is there any situation where a married couple can have an equal or higher net (after tax) household income by having one of them stop working? The old spider sense says no, but taxes are like voodoo sometimes.
Do they have kids? It’s not uncommon for childcare expenses to be high enough to almost wipe out one partner’s salary, especially with multiple kinder.
Longer answer: In the 100-200k range of income, there are many tax credits and deductions that phase out - child tax credit, education credits (if they haven’t already expired), student loan deductions, PMI deduction, IRA contributions for uncovered spouses, and so on. Passive losses from rentals may be disallowed. In this range of income people are either in the 25% or 28% bracket, but if you calculate the loss of these items as part of the “marginal tax rate” then the rate is a lot higher - I’ve seen a client paying effectively 37% more tax because of losses of other deductions/credits. When you add in FICA withholding (7.65%) and state taxes (possibly another 10%), then the woman’s extra 30k of income could be adding a lot of tax. However, even the absolute worst-case scenario is that they’re keeping, after taxes, about half of what she makes.
If anything truly puts them ahead by having her quit, it’s a reduction in expenses like wardrobe, gas and child care.
Never heard of this. Unless… the wife had a small part-time job. Minimum wage of say, $6/hr and 40hr/wk = $240/week or $480/paycheque; I assume taxes on that would be low. that would require a heckuva income for him to recoup say, $400 in taxes.
the only difference is that now she is a full dependent. If the US taxes are like Canada, the first dependent is something like a $8,000 deduction (never worried about it). At typical 40% or so top marginal tax rate assuming he is a super breadwinner, that would mean $3600 less in taxes, about $300 a month more on his paycheque. Considering her takehome for a full-time job would be at least $800/month, the general conclusion is that yes, he’s fullashit.
The only possibility is that she was part-time making just a bit over the $8000/yr dependent deduction, so he’s recoupng 40%-plus of his taxes on $8000. But still, the difference would be whether her take-home percent exceed his tax rate percent. Not likely.
(I assume the taxes are the same, married or sinle, for a couple, like they are in Canada. You just get to share some expenses or benefits with the spouse.)
(Item, not sure, but minimum wage here in Canada is over $10 an hour here I think. the trick is to find full-time employment; it seems McD’s and Tim Hortons like to use casual, juggle your schedule to be different every week, etc. the money is the least of the hassles. But $10 at 30 hours a week is still $1200/month, with a take-home of probably $1000. )
Just considering taxes, there is no 100% tax bracket so when the wife earns money it cannot be totally wiped out by taxes. But if you are in the top bracket as they are, the small check the wife makes will seem so much smaller when Uncle Sam keeps 35% right off the top, plus another 7% for SS, etc. The wife is probably only bringing home 50 cents on a dollar. With tax breaks, like the child care Maggie mentions, it might not be worthwhile to earn those dollars.
Your understanding is correct. If you’re one cent below a higher tax bracket, and then earn another $100, the higher tax rate only applies to that $100, so taxes on your original earnings are exactly the same.
** There are some deductions and credits that are means-tested, but nearly all of them phase out gradually, so earning more won’t increase your taxes at all. And at any rate they all go away long before $150K/year.
Probably not worth it, but you could ask the guy 'Hey, how exactly did the math work out? Because when you move into a higher tax bracket, you only pay the higher rate on the extra income, so there must be something else. I’m just curious, cause I want to make sure I’m not losing money." Taking notes on how to evade questions is probably the only benefit you’d get out of asking, though.
As stated several times above, the actual math based just on the tax angle doesn’t really work out as the OP’s friend described it. However, perhaps he didn’t get the whole story of the “calculation”. In the broader sense, I can absolutely see it making better financial sense for her to stop working, if her pay is relatively small.
Think about all the possible savings that result from not having both spouses working full-time:
Less miles/gas/depreciation on a car.
Possibly less need for a nice/big wardrobe.
Likely more home-cooked meals in the house versus eating out (big savings there).
They may be hiring a housecleaning service now that would not be necessary.
More time available to find ways to save money (i.e. maybe she gets into “extreme couponing”)
Maybe she’ll be able to start the garden she’s always wanted to, and that could save money on groceries too.
Child care is a huge expense (I know it’s not the case for the OP though)
On and on …
Subtract out things like this, and it can easily be more financially advantageous for her to not work.
No, that’s not how U.S. dependents are – it’s the same amount per dependent (including yourself) no matter what anyone’s income is. And with the husband making so much more than the wife, they’ll be filing jointly (unless, uh, they’re too stupid to do the math…), so they take two dependents every time, no matter how much the wife makes (or whether she’s working at all).
If she is making 30K per year that takes them from the 28% bracket to the 33% bracket. That means she would pay around 10K in income taxes and 2300 in FICA tax. Depending on the state they live in they could pay around 3k in state income tax. That means she would clear $14,700 after taxes. With the added dependent deductions they would pay 1,600 less. Thus her $30K salary would net them, around 13K per year. Her tax rate was about 55%.
They could be subject to the alternative minimum tax given the income indicated, and that makes the simple intuition one gets from the standard tax table less applicable. (I would guess that even with AMT, the basic monotonicity property of net pay vs. gross pay probably holds, but I’ll let someone else back that up. The AMT worksheet is basically voodoo.)
That’s the angle I thought he was going for when he started talking, but he made it clear that this was strictly a “the government is so mean to me” thing not an overall household economics thing.
I’d love to, just to make him squirm. But he is the sort of guy who doesn’t take well to being called on BS and I have to work with him every day.
The grossly oversimplified explanation is that AMT is a flat tax at 28% that ignores most of your deductions. (Ironically, this is what so many people seem to be arguing that we need… but we already have it, and we hate it with a passion. But I don’t want to derail the thread). AMT is also more likely to be triggered by an increase in deductions like taxes paid or mortgage interest, rather than by an increase in income itself.
AMT won’t change the basic math that after-tax/take-home pay is always something more than 0% of what you earn.
I know someone who drives a gas-guzzling SUV ten miles to work a low wage job. There’s work clothes, gas for the car (I’d be surprised if that thing gets much better than 15 MPG), wear and tear on the car, emotional stress, and the raw time spent. I’ve tried to tell them that it may not be worth it in the end, but they claim that they need the experience. So, in essence, they are getting little benefit now hoping that staying on the job will give them the experience they need.
As many other people have said, it’s not possible (although it is possible that most of the money she earned went to taxes, after the loss of various deductions is factored in).
What makes it confusing to people like this is that when employers pay you, they don’t do your family taxes for you. They pay each guy based on their own salary and number of dependents, and leave the family income and any number of deductions out of the equation. This means that no one knows what they’re really paying from looking at their paycheck - the only way you can figure it out is by doing your taxes at the end of the year. And the only way you can know what your taxes would be under some alternative scenario is to do your taxes twice. Most people have enough trouble doing it once. So a person like this might genuinely believe what he’s saying is true, but be incorrect.
[I myself own a lot of MLPs, which are very complicated tax-wise because they pay distributions which are counted as return of capital rather than income. In order to track the net impact of my investments, I decided I would do the taxes with and without the investments. But that lasted one year :).]
The only way I could see it working like the guy stated (i.e. not considering expense savings from one spouse not working) is if the wife made less than the deduction per allowance. So the husband now claims a “2” on his withholding, while previously he and she each claimed “1”. The lower withholding on his check could amount to more money than her entire previous take home check. This would only be true if she made very little compared to him.
I think anyway. But I’m not an accountant or tax lawyer
Some people above had the right approach–phaseout of deductions and the earned income tax credit must be taken into account, not just marginal rates. It is possible that there’s a crossover point at which earning an extra $1 of income results in tax equal to or greater than $1. I haven’t thought about or researched these closely enough to know if that crossover point actually exists.
So, my politifact/Snopes score for the OP’s friend’s claim is “possible but not very damn likely.” The OP has to decide whether he believes this guy is really capable of doing the math correctly (which is complicated by the fact that things can change from year to year, and he could be forgetting one little factor that throws it all off).
