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Financial Planning / Tax Strategies
|Subject: Re: Tax rates: is it worth it to work?||Date: 3/24/2001 1:23 PM|
|Author: pmarti||Number: 48924 of 122998|
I have heard people say it's not worth it for the wife to go to work, because "it will just raise our tax bracket." The implication is that having extra income coming in could actually cost the family money overall because of higher taxes.
This seems wrong to me. Isn't it the case that higher tax rates only apply to marginal income? So if husband makes $50,000 and is taxed at, say 33%, and wife makes $25,000 and raises the couple's marginal tax rate to 38% or whatever, the first $50,000 will continue to be taxed at 33% and only the additional income will be taxed at the higher rate. So the extra income will definitely benefit the family. But I have heard lots of people say that the extra income will cause ALL the income to be taxed at a higher rate.
Am I right?
Everbody has a point, and no one is 100% right. Let's assume for discussion that the primary earner of the couple makes more than the total of the couple's personal exemptions and itemized or standard deduction. The second earner's entire income is subject to the marginal rate, and if that income raises the bracket, the latter dollars will be taxed at the higher marginal rate.
Thus, the effective tax rate (tax / income) is much higher for the second earner than for the first. You also need to include the effect of Social Security and Medicare taxes, day care, commuting, clothing, and all the other expenses of having a job.
The bottom line is that a second income doesn't yield anything near what it looks like on the surface.
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