Scott wrote:
- quote -

I would add in a few other issues:

a) if parent X stays and home and parent Y can earn overtime (more
money per hour)?
b) if parent X stays at home is their a promotion to consider for
parent Y?
c) can parent X reduce hours and still work/ keep skills current (this
was posted above as a secondary issue, to me this is a primary
concern).
d) can parent X reduce hours or stay at home, and increase tax
deductions because of volunteer work associated with kids sports,
activities and other?
e) what are ages and needs of kids? Handicaps, activities, school
commute (is a bus system available?)

I think this is a more complicated question than simply taxes. Several
people have hit on it but I am not sure it is fully understood by many
people who would read this. If I am wrong on anything, please correct
me.

1 or 2 incomes creates a significant set of financial planning
questions.

1) Tax implications - lower income allows for deductions that are
dependant on a percentage of income (medical bills, misc deductions) as
well as different qualifications for IRA, Roth IRA deductions, etc.
Again it depends on what level the one income is vs the 2 income level.
These are things that can easily be done by the tax programs that
have been mentioned. You can buy a good basic tax software program for
20-40 dollars and play around with the numbers. Simply takes time and
a small investment (Yes there are free places you can do this but I
have found they sometimes make it difficult to do scenario testing)

2) Current financial situation - Current income minus current expenses
evaluated against the proposed income minused expected expenses. Since
they are paying the nanny $26k a year I would hope that the second
income is more than that plus SS taxes and benefits. A good
spreadsheet combined with the information from the tax program can
allow you to create different options plus don't forget your current
debt level and what the loss of one income can do to your credit rating
if you are looking at buying a home in the near future.
For example - One income, no nanny, reduction in expenses based on
work clothes (though I find this one suspect as most people will still
buy clothes but it will amount to something), reduced eating costs if
you eat out and plan to eat at home more, gas costs (this can be
suspect too depending on how much the stay at home parent is going to
be taking the child on field trips, sports, activities, visiting
friends, etc).

They may want to run the numbers on the stay at home parent working
part time instead or taking in other children to offset the loss in
income. This would allow them to impact the financial planning aspect
which is next. Obviously it is not a straight forward question but
takes some significant thinking and understanding what is the primary
motivation of staying at home.

3) Financial future - 401(k), IRA, Roth IRA, overall savings, college
planning, retirement, insurance, SS - This one presents the most
significant challenge. Is the stay at home parent planning on staying
at home until the child is 1) in school 2) in high school 3) forever?
Can the stay at home parent run a small business at home? Take in
another child or two to nanny themselves? What impact will it have on
future potential? Are they giving up a large career potential? Lots
of different scenarios to think about and determine which ones are most
likely and plan around them.

4) Questions outside of the financial/tax arena- Parent/child
relationship, bonding, home schooling, meals at home together, more
relaxed atmosphere, etc.

Obviously not a straight line question that is resolved by clicking a
few buttons and going Aha!! Part of the reason that financial planners
can be worth their cost to help lay these scenarios out and help with
the thinking process.

Have a great day and I truly enjoy the reading these posts.

Scott

"John Richards" <jr70[at]blackhole.invalid> wrote in message
news:OCeOg.740$Ij.717[at]newssvr14.news.prodigy.com...
- quote -

and higher clothing costs, etc.

"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote in message news:jA%Ng.131716$5i3.65343[at]bgtnsc04-news.ops.worldnet.att.net...
- quote -

Don't forget to factor the spouse's commuting costs into the
financial decision picture.

--
John Richards

Elizabeth Richardson wrote:

- quote -

Excellent advice.

Ayone who is married should consider the financial impact of a possible
divorce, if statistics about divorce rates in this country are to be
believed. It's such an emotional issue most won't do it, but on the
other hand, the whole concept of a pre-nuptial agreement for financial
planning purposes seems to be gaining more acceptance even among
non-celebrities.

If things don't work out ten or twenty years down the road and one
spouse has been the sole breadwinner all that time, there will almost
surely be alimony to pay. This can have as large an impact, if not
larger, than all the time you spend on retirement planning.

-Mark Bole

"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote in message
news:BW_Ng.131441$5i3.115867[at]bgtnsc04-news.ops.worldnet.att.net...
- quote -

right you are. let me rephrase - you might also be saving money on take out
food and cleaning/gardening services, etc. depending on how much bandwith
the stay at home spouse has (probably changes as the kids get older)

John A. Weeks III wrote:

- quote -

I am continually amazed at how many people I know, some very educated,
some earning mucho dinero, think this way. Good point, John.

-Will

"joe.spam.weinstein[at]gmail.com" <joe.weinstein[at]gmail.com> wrote in message
news:1158183446.414154.55390[at]e63g2000cwd.googlegroups.com...
- quote -

not to mention the stay at home mom keeping the house spotless and having a
delicious meal fully prepared when hubby comes home each evening. They
still do these things, don't they?


======================================= MODERATOR'S COMMENT:
Please relate future comments to financial planning.

John wrote:
- quote -

This is not a purely financial decision. I would expect the
emotional health benefit of mother and child growing up
together rather than child in daycare is worth quite a bit
worth in itself.

Many people don't understand the incremental nature of taxes.
- quote -

oh, I didn't realize that was what you were getting at. Thanks. I think
your detailed explaination will be helpful to someone, now or in the future.

In article <OMINg.31738$QM6.7412[at]bgtnsc05-news.ops.worldnet.att.net> ,
"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote:

- quote -

Many people do not understand that a tax bracket is incremental.
Rather, they assume that if they get moved up to the next bracket,
they end up with less total money. The classic statement I hear
is that someone doesn't want to work a day of overtime because it
would kick them up into the next bracket, so they end up earning
less.

For 2006, the 25% bracket is $30,650 to $61,850. Above $61,850,
it goes to 28%.

The chart looks like this:

0 - 7550 = 10%
7550 - 30650 = 15%
30650 - 61850 = 25%
61850 - 94225 = 28%
94225 - 168275 = 33%
168275 and up = 35%

Lets assume this guy earns $20,000. He would pay (ignoring
all deductions):

7550 at 10% = $755
12450 at 15% = $1867.50
for a total of $2622.50.

Lets now look at the case where the wife earns $10,000.
Now, we have:

7550 at 10% = $755
22450 at 15% = $3367.50
for a total of $4122.50, an overall tax rate of 13.74%.

If you break this down, it is $2622.50 for the first $20K
that the husband earns, and $1500 for the wife's $10K.

Lets change the scenario to where the wife earns $12,500,
leaving the family with a total income of $32,500, which
kicks them up into the 25% bracket.

7550 at 10% = $755
23100 at 15% = $3465
1850 at 25% = $462.50.
for a total of $4682.50, an overall tax rate of 14.4%.

The point of all this math is:

1) in the 3rd example, even though the wife's earnings kicked
them up into the 25% bracket, the tax on the husband's $20K
in earnings stayed the same.

2) they did not lose money by jumping into the 25% bracket.
When their income went up by $2500 to move them into the
25% bracket, their tax only when up $560.

3) despite being in the 25% tax bracket, their overall tax
rate was only 14.4%.

Many people don't understand the incremental nature of taxes.
They assume that if they jump into the 25% bracket, they pay
25% on their entire income. If that were the case, this final
example would have looked as follows:

32500 at 25% = $8125. If that was the case, the additional
$2500 that the wife earns in the 3rd example raises their taxes
by $4,002.50, which means that this additional $2500 actually
makes them go behind by $1500. Also, that means that the husband
now pays $5000 on his $20K income, rather than $2622.50, so he
takes a big hit because his wife earned just a little more.

The net-net is that you do not lose money by going into a higher
tax bracket, and the tax that the husband pays on his income is
not affected by what his wife earns (if you break the joint income
and look has his income and tax first). I get the impression that
the original poster does not understand that when he says that "her
income pushes them into a higher tax bracket". He said it as if that
was bad, and in reality, that is good.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

John Richards wrote:
- quote -

I'd bet the "not affect" reply reaoning will go like this; Since you are
the first earner, (I'm looking at tax rates on
http://www.fairmark.com/refrence/index.htm) say you make $70K. STD
Deduction, $10,300, 2 exemptions, $6600, Tot, for $16,900 deduction.
So far, taxable income is $53,100.
Income is taxed here as "$8440 plus 15% of the amount over $15,100."

When you stack on the wife's income, any income putting them over
$61,300 is taxed at 25%. In effect, the first earner's taxation doesn't
change, unless the second earner makes so much they begin to lose a
piece of their exemptions. "thinking at the margin", I tend to look at
it same as John R.

This is a bit oversimplified, as I ignored state tax or mort interest,
and use STD deduction. Also, the OP needs to consider loss of FICA
credits to his wife's account if she stays home. (And anything she'd add
to savings/ 401/ IRA)
JOE

"John A. Weeks III" <john[at]johnweeks.com> wrote in message news:john-5334AC.19060912092006[at]sn-ip.vsrv-sjc.supernews.net...
- quote -

Huh? I'd assume the OP and his spouse file a joint return, so
it is the sum of their incomes that matters, not the individual
incomes.

--
John Richards

John wrote:

- quote -

I use www.turbotax.com and I really like it.

-Will

"John A. Weeks III" <john[at]johnweeks.com> wrote in message
news:john-5334AC.19060912092006[at]sn-ip.vsrv-sjc.supernews.net...
- quote -

I think your explanation would be in order.

In article <6c591$4506ca17$d1914a07$9322[at]NAXS.COM> ,
"John" <john[at]foo.com> wrote:

- quote -

I get the impression that you might not fully understand how
tax brackets work. No matter how much she makes, it does not
affect your tax bracket. If you are not clear on why that is
true, please ask. Otherwise, I'll assume that you do, and not
bother the group with an expliantion.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

John wrote:

- quote -

Taxact.com looks pretty good, it's online or a free download (PC only)
for simple returns.
JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:S7CdnfR1osErr5rYnZ2dnUVZ_r2dnZ2d[at]comcast.com...
- quote -

That's what I'm looking for: recommendations to good online tax apps that
will let me compare multiple scenarios. When I search, I see hundreds. Can
you send me a link?

Thanks,

John

John wrote:

- quote -

I'd recommend getting a copy of tax software to run both scenarios. You
can enter the two W2s and then just knock hers off to see.

I considered the above, and found that it took a huge percent of my
income to net enough to pay the nanny. I just didn't want to derail my
career, as well as the 401k/IRA and SS credits.

There are online tax forms that will let you run the scenario you'd like.

JOE

"John" <john[at]foo.com> wrote in message
news:6c591$4506ca17$d1914a07$9322[at]NAXS.COM...

- quote -

Why don't you quit and be a stay at home Dad? Does your wife want to quit
working? I think family finances shouldn't be the only reason for both
adults to be working.

Elizabeth Richardson