I often come across couples who firmly believe in this statement, “In Silicon Valley (or elsewhere as well) it is just not possible to thrive (or survive) on a single income; both the parents have to work to meet family needs.”
If you are among those who believe this is a norm, it is time to pause and do some analysis to find if a two-income household really saves that much.
Under what circumstances – financial or personal is a second income worth it?
How much are we actually getting as a take-home income after the taxes and other overheads that come as a package in a two-income family?
Unless you have a fantastic tax calculator at your disposal, you won’t know until tax time comes around.
An analysis from this article: Two-Income Trap: Why Many Couples Shouldn’t Both Be Working For The Money:
There are two things to remember when it comes to taxes. First off, social security taxes of 6.2% are subtracted from the first $97,500 of your pay. Medicare taxes will eat 1.45% of your paycheck with no limits. What this means is that in most cases, a second wage will be hit by 7.65% in taxes right off the bat. While this is the case for most people with kids or not, much too often people look at their second wage gross pay with little regard for how much they actually get to take home.
The other consideration is the income tax brackets. During 2007-2010 people can get away with a lot more in a second income without jumping up to the next tax bracket due to the Bush tax cuts. But from a professional standpoint, these temporary provisions are due to “sunset” in 2010 and there is no indication that they will be extended.
What this means is currently the first $64k of your taxable income is taxed at a rate of 10-15%, and the next $64k you make as a married individual will be taxed at a rate of 25%. Even at these rates, you can see that a second wage in many cases will be taxed at a higher 25% Federal tax rate. When you look at pre-2000 tax rates, and where rates will most likely be in the future, it is even worse. Going by these as a reference, only the first $43,000 will be taxed at 15%, and the next $65k or so will be taxed at 28%. For the longer term, these are the tax rates we are looking at, and it puts a much larger dent in the second income of a married couple.
Second Income Calculators
- An interesting calculator which analyzes what the second income really amounts to.
- Another calculator is at the msn.com moneycentral website.
You might also enjoy this article from the CNN archives: Does a second income pay?
What’s your take on the debate debate? Is it a must or an option?