By R. Joseph Ritter Jr.
Question: My spouse recently started working, so we can have more income. At the end of the month, we do not seem to have as much money as we thought we would. Can you help me understand why? Submitted by “Feeling Stressed”
Answer: Dear Feeling Stressed, It would seem when both spouses work you should have more money at the end of the month. However, this is not true in all cases. In fact, the lower your income the greater the potential for the second income to cost you money.
With an additional income, child care and after school care expenses come into play, tax credits are lost or reduced, and income taxes increase, often putting you in the next higher bracket. This is before additional transportation, meal, clothing and other personal expenses. Let's look at an example. A family with two toddlers has one income of $22,500 and receives an Earned Income Credit (for 2013) of $5,372, for a total income of $27,372 (the EIC is refundable, meaning you get a check in the mail or a credit against a future year's taxes). With the standard deduction and personal exemptions, there is no tax. If the second spouse accepts a new job earning $17,500 (gross), federal income taxes can be offset by the credit for child care, however, the Earned Income Credit drops to $1,759 (for 2013). With additional personal and transportation expenses estimated at $3,000 and child care estimated at $10,000 annually, the family's net income is now $28,559, or just $887 more than if only one spouse worked.
Other factors to consider include less family time together, more difficulty taking care of household needs, vacation time may cannot always be coordinated, and one spouse leaving work to care for a sick child (which could reduce your pay). You have to decide whether an additional $887 is worth all these downsides.
To get the most out of a second income, you have to eliminate or significantly reduce child care expenses, or, if that is not possible, consider having the working spouse pick up a second job for a short time. If you are thinking about adding a second income, you should start by having an analysis prepared to illustrate the pros and cons.
R. Joseph Ritter, Jr. CFP® is President of Zacchaeus Financial Counseling, Inc., a non-profit organization serving low-income households with financial planning and financial coaching services. Zacchaeus Financial Counseling, Inc. provides services to individuals and conducts free financial clinics and seminars.
* * * *