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Impact of a second income

March 1st, 2008 at 02:50 pm

Since my husband and I are both in a highly-paid profession (engineering), when we are both working we get hit at taxtime by the marriage penalty and the phaseout rules. I took some time off to be a SAHM during 2006 and half of 2007, then started doing contracting for 20 hours a week. I thought it would be really interesting to see the impact that the second income had on our taxes this year, so I saved a "what if" file in TurboTax and deleted all my business income.

I worked for 6 months, and earned $23,735. I can shelter $4363 of this in a SEP-IRA.

Our AGI increased by $17,477, our deductions decreased by $240, our federal tax increased by $7,877, and our state tax increased by $1625. This makes the marginal tax rate on my income 41%. The other big impact is that we are no longer eligible to contribute to the ROTH IRA.

I paid $1963 to a babysitter for 3 months at 10 hr/wk. (I increased her hours to 20 hr/wk in January).

So altogether our net income from my working was $12,030 -- an extra $2,000 per month. Let me tell you, an extra $2k makes the budget feel a lot looser!


5 Responses to “Impact of a second income”

  1. disneysteve Says:

    I know the feeling. My wife left a full-time job last February. She didn't work again until June when she took a per-diem job, working 2-3 days/week. For the year, our combined gross income was down by just over $14,000. Even though we didn't need her income, and put most of it in savings, it still made me feel more comfortable knowing that the money was available if we needed it.

  2. monkeymama Says:

    actually, there really is no marriage penalty. So basically, if you think it is bad now, wait until we revert back to the marriage penalty. (Eliminated by the Bush tax cuts). These days most everything in the tax code is double for marrieds as it is for singles. That isn't how it has historically been at all.

    But yeah - you are no doubt in a huge tax bracket and getting hit by the phase-outs.

    & yeah, your post is exactly why my spouse doesn't work. On top of all that we don't pay for working expenses, we don't have to have a second car (though we do for convenience), our auto gas bill is rather low AND we don't pay much for convenience. So, the lucrativeness of a second income shrinks considerably. I'd be curious what you would be netting if you considered all of these kind of expenses. For us, it was easy to go down to one income because our expenses went down considerably, at first. If nothing else, we both used to eat out a lot more. Now we have time to grocery shop and cook every day.

    Of course, when daycare is out of the equation, it becomes another story. Our angle is to either get a 401k (so he can put his entire income in a 401k, to avoid much of the extra taxes - can't do anything about payroll taxes, OR to get decent health insurance benefits. At least that would free up a good chunk of our cash).

    But working for straight cash? Not very lucrative with small kids.

  3. monkeymama Says:

    P.S. I just wanted to say I would be surprised if my hubby would net $1k/month, or $500/month once you consider an increase in expenses (& stress!!!!!!!).

    Anyway, in his case since he is not making so much, we find it WAY easier to try to scrounge up another $500/month here and there than devote a large amount of time to a job. Not that we hit $500/month, but we often hit say $300/month extra income.

    I have so many friends in awe we can do it on one income. I feel like at most we are down $200/month. (If he would bring home $500 monthly and we scrounge up about 1/2 of that). Big whoop. We took a $2500/year pay cut. LOL. But in their eyes we took a $40k pay cut. You know, it's just funny. If he could work and keep $40k/year, well yeah, then we would be kind of crazy not to take that second income. We could retire in no time! If only it were so simple...

  4. thriftorama Says:

    Yep. I used a calculator on bankrate to see how much of my income we actually got to keep after added taxes and expenses, and it turned out I was costing us money by holding down a reasonably paid professional job. It really made all the hassle not worth it. And that was without kids. Now I work from home, part time. We'll see how that goes...

  5. zetta Says:

    In my case working expenses are minimal other than childcare. Engineers get to wear jeans and t-shirts to work, I used to take my lunch most of the time anyway, and we always cook dinner at home for health reasons. We'd have to be in extreme circumstances to give up the second car, and I probably rack up as many miles driving to playdates and activities as I did while commuting. All those online calculators tell me I should work! Wink Plus they don't factor in the opportunity cost (missed wage increases and retraining expenses) of being out of the workforce. But it was worth it to me to be home full-time for the first 18 months, and I can see doing part-time through at least the elementary years (as long as I can find work that permits it.)

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