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Big Bad Taxes

April 11th, 2008 at 08:29 am

Well, I have made clear that our taxes have been pretty low since we have had kids. Of course, I ran across an old post on the forums when I was searching for some old forgotten topic where someone had assumed I was playing a game with the IRS. I had just never seen that reply before, and it was quite ancient to reply too...

I have to say, no games. Which I have said before. But I Wanted to clarify. I am a W-2 employee. I withhold plenty. On average I owe $0 and get a refund of $0 for tax day. I usually run pretty breakeven. (Owe a few hundred fed, get a few hundred back from state. How it usually goes).

So yes I wanted to illustrate again how living on one income we get to keep a big chunk of our paycheck. & why a second income doesn't always sound terribly lucrative.

Of course, this whole topic reminds me there should be much more tax education in schools. MUCH more. I think people could make much more informed financial decisions if they understood the tax ramifications.

Why am I the only one figuring out that it is not worth 2 incomes and $100k income because the people I know pulling this take homes less money than us at the end of the day? $20k/year daycare? An extra $10k in taxes? Plus all the working expenses. I know a lot of people who make a lot more money than us but have a much more pinched cash flow due to just the basics of working like taxes, daycare, and fuel for commuting. Doesn't even get into the convenience factor (for example, how much money we save with a spouse to cook every day and take care of much of the household, etc). & I AM talking about miserable people who endlessly complain about how they "have to" work. (Not the people who are happy to work; that's another story). I try to educate them and I have helped some. But the rest I think, well, they just think I am crazy. Big Grin

On the flip side, I look forward to my spouse working some day and maybe maxing out a couple of 401ks. That would make sense. We could put $30k more every year into retirement and pay little more than payroll taxes. So I know taxes will factor heavily into our future working decisions.

But yeah, but why do few people take all this into consideration? BEcause they just don't understand it. & who could blame them for not understanding it? The tax code is insane. But a basic education would help...

Likewise, I saw a comment the other day about average taxable income and tax brackets, and I thought to myself, "what does that have to do with anything?" I really find LITTLE relation between actual income and taxable income. There are a lot of deductions and all that out there. Which I guess my tax return will show. We are in an awfully low tax bracket. I wouldn't consider our income low in the least.

Reminds me, I still have to formulate a post on the taxing of retirees. They don't have any deductions. They don't get much in the way of tax breaks. So their taxable income will often be much higher for much less income than their working counterparts. But I do have to get to that post one of these days. I think the tax code has shifted so much with time, that the idea of lower taxes in retirement was probably once true, but is now greatly a phallacy. I have had more insight into why this year than in past years (but I see it clearly with my highly taxed retiree clients. Another post for another day).

Anyway, I have to say this year is probably our highest tax year since having kids. I did have a ROTH conversion I pulled it out of my tax return for this illustration. Because it just really skewed things. So forgetting that, this is what we had:

$75,000 Gross Wages
-23,000 Itemized Deductions***
-14,000 Exemptions (4)
38,000 Taxable Income
x Tax Rate 10%/15%
5,000 Tax
(2,000) Child Tax Credit (2)
3,000 Net Tax

***Itemized Deductions:
$ 3,000 Medical (mostly insurance)
6,000 State Taxes (mostly property tax)
13,000 Mortgage Interest
1,000 Charity
$23,000 Total Itemized

3,000 Net Tax/ 75,000 Income = 4% effective tax rate.

Thus, I only have to withhold 4% of my income to break even.

For state I withhold 2%.

Payroll taxes? withhold 8.5% (includes California taxes).

So 14.5% of my income is withheld for various taxes. More payroll taxes than anything else.

I have been saying for a while I get to keep 90% of my paycheck. But it looks like our income is inching up a bit and we are paying more. So I guess I should revise that to 85%. But I still don't find 85% half bad. Wink

So I take home almost $65k/year. How much do you have to gross to take home that much? (I often see people say they have to gross low six figures to take home $65k. I think, egads!).

Likewise, we don't have any taxed investing income or stuff like that (well not much anyway) because we primarily invest in IRAs and other tax-deferred investments.

Anyway, yeah, the kids are 5 & 3 this year and this is our worst tax year since having them. We had a couple of $0 income tax years (one year the government paid us - refundable child tax credit when we had our second child). Having a much lower income at the time, taking significant maternity leave, and having non-taxable income sources like unemployment and disability, have made a large difference. We took the retirement tax credit those 2 years as well.

Likewise, when it does come to a second income some day, some things we keep in mind to keep our taxes on the low side are contributing heavily to 401ks, as mentioned. A second income is also when things like HSAs and 529s will suddenly become VERY valuable to us. Whatever we can shelter from taxes... But yes, all VERY on the up and up. As you see there is no elaborate tax strategies here. Wink

But yeah, hell if I am going to withhold more taxes than I need to. Some people seem scared by all that withholding stuff as well. But again, a little more education would go a long way in that regard.

I guess what I should do it pull out our 2001/2002 tax returns and see how much we were paying. Probably a hell of a lot more, before kids. I am sure...

3 Responses to “Big Bad Taxes”

  1. -Jerry- Says:

    I think that the argument against double-incomes invariably leads people to think that someone is arguing for-or-against moms staying home with their kids. Actually, that subject - while important and worthy of debate - doesn't have to be part of the equation at all. It can all come down to dollars and cents, as you have pointed out. It's nice to have additional spousal income to pack into a retirement annuity or investments or whatever, but that has to be timed correctly if you are dealing with a family and child care.

  2. monkeymama Says:

    Amen JErry. I get frustrated when this topic is always tied to the SAHM debate. Think outside the box a bit, people. Our daycare provider didn't want to put her kid in daycare when she got divorced, so she opened a daycare. IT's a common story, but a perfect example.

    But yeah, I am a working mom, my hubby is a SAHD, and the kids go to daycare a decent chunk of the week. It REALLY works for us. So the debate always insults me from all sides. I live all sides. We want a spouse home with our kids. We don't think daycare will ruin them (quite contrary - it's a luxury for us), and likewise, me working is not a bad thing for my kids. (think outside the box, who said the mom had to stay home? I breastfed my kids 1 year each. Modern technology allows that (and lunch breaks home, etc).

    Of course, in an ideal world we'd both like to work part-time. So that is what we work towards. We both want to be very involved in child rearing. We both want to have a life outside our kids. We find that balance regardless; we make it work.

    So when this topic disintegrates into that, I always think, why? Who said anything about making women stay homs. It's a lot of "not thinking." There is a lot of thinking outside the box in these matters.

    Reminds me when I got called a sexist pig for writing an article on the one-income subject. Hehe. Not knowing I was a woman. Wink

  3. LivingAlmostLarge Says:

    Just started a Thread on Women In Red, explaining the breakdown of why you don't want to work for $12/hr (if you make $50k and ONLY pay $800/month in daycare for a newborn, where we both live it's more like $2k/month). http://moneycentral.msn.com/community/message/thread.asp?board=womeninred&threadid=632414&boardname=Hide&header=SearchOnly&footer=Show&linktarget=_parent&pagestyle=money1

    But women keep arguing that it doesn't make sense to NOT work! They don't get it at all. SIGH! Right now the board is wonky so I would post if I could. But realize this, that when you earn more, you live on more, need to save more for retirement. PEOPLE just don't get when you live on less you need to save less. Sigh.

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