Two Income Households Do Not Always Help the Budget
Article by R. Joseph Ritter, Jr. CFP® EA
There may be times in the life of a family that one person’s income is not enough to support the family. Issues like this cannot be solved easily because very difficult decisions are often required. This article discusses the financial effects of both spouses working to provide two incomes, non-financial issues to be considered, and possible alternatives that may be available. We also want to facilitate a dialogue in your family about the expenses and sometimes overlooked consequences which can be involved in adding a second income.
If you are here because both spouses are already working, this article can also help start a discussion on eliminating one of the incomes. Can one spouse safely stop working to homeschool or stay home with children? What will it do to the budget?
We will be taking a look at six families. Three families have two children under school age (toddlers), and three families have two children who are in school. From purely a financial point of view, the following illustrations highlight the typical expenses and tax effects resulting from adding a second income (or eliminating a second income).
In the figure below, both the McNabb and Douglas families have a current income of $42,500, and they hope to increase their income to $75,000 by adding a second income. The McNabbs have two toddler children, and the Douglas family has two school age children.
Tax Analysis
| Gross income | $42,500 | $75,000 |
| Standard deduction | $(24,800) | $(24,800) |
| Taxable income | $17,700 | $50,200 |
| Tax | $1,770 | $5,633 |
| Child care credit | $0 | $(1,200) |
| Earned Income Credit | $(2,099) | $0 |
| Income tax / (refund) | $(329) | $4,433 |
| Payroll taxes | $3,251 | $5,738 |
| Total taxes | $2,922 | $10,171 |
* Child tax credit omitted because it does not change the net result.
Net Income Analysis
| McNabb | Douglas | |
| Income – one spouse working ($42,500-$2,922) | $39,578 | $39,578 |
| Income – two spouses working | $75,000 | $75,000 |
| Expenses if second spouse works | ||
| — tax | $10,171 | $10,171 |
| — fuel, car repair, clothing | $3,000 | $3,000 |
| — daycare | $18,000 | $12,000 |
| Total | $31,171 | $25,171 |
| Net income – two spouses working | $43,829 | $49,829 |
| Net increase | $4,251 | $10,251 |
You can see that with both Mr. and Mrs. McNabb working and earning $75,000, they really only added $4,251 – not the $32,500 they were expecting. The Douglas family did a little better, but only because after-school care costs are less than daycare for toddler-age children.
$4,251 is a small amount of money for the great effort and expense that goes into adding a second income. If your financial needs are greater than $4,251, you may want to first consider the alternatives at the end of this article. Or, if you are switching back to a one-spouse income household, can you find $4,251 in your budget to safely eliminate the other spouse’s income?
Just a note about the tax increase. The Earned Income Credit (EIC) phases out at completely for incomes over $56,844 for 2020. The EIC is larger than the credit for child care expenses, resulting in an increase on the family’s tax burden. Also, the credit for child care expenses is reduced as incomes rise. The maximum possible credit for two or more children is $2,100.
In the figure below, both the McHortle and Davis families have a current income of $32,500, and they hope to increase their income to $60,000 by adding a second income. The McHortles have two toddler children, and the Davis family has two school age children.
Tax Analysis
| Gross income | $32,500 | $60,000 |
| Standard deduction | $(24,800) | $(24,800) |
| Taxable income | $7,700 | $35,200 |
| Tax | $770 | $3,833 |
| Credit for child care | $0 | $1,200 |
| Earned Income Credit | $(4,205) | $0 |
| Income tax (refund) | $(3,435) | $2,633 |
| Payroll taxes | $2,486 | $4,590 |
| Total taxes | $(949) | $7,223 |
* Child tax credit omitted because it does not change the net result.
Net Income Analysis
| McHortle | Davis | |
| Income – one spouse working ($32,500+$949) | $33,449 | $33,449 |
| Income – two spouses working | $60,000 | $60,000 |
| Expenses – two spouses working | ||
| — tax | $7,223 | $7,223 |
| — gas/car repairs/clothing | $3,000 | $3,000 |
| — day care | $18,000 | $12,000 |
| Total expenses | $28,223 | $22,223 |
| Net income – two spouses working | $31,777 | $37,777 |
| Net difference | $(1,672) | $4,328 |
This figure illustrates a much different financial impact. By raising the household income from $32,500 to $60,000, it’s actually costing the McHortles to employ the second spouse! This may be one reason why some families feel more pinched or like they are not getting ahead if both spouses are employed.
In this last figure, the Benson and Fraley families both have a current income of $40,000, and they hope to double their income to $80,000 by adding a second income. The Bensons have two toddler children, and the Fraleys have two school age children.
Tax Analysis
| Gross income | $40,000 | $80,000 |
| Standard deduction | $(24,800) | $(24,800) |
| Taxable income | $15,200 | $55,200 |
| Tax | $1,595 | $6,240 |
| Credit for child care | $0 | $1,200 |
| Earned Income Credit | $(1,406) | $0 |
| Income tax (refund) | $189 | $5,040 |
| Payroll taxes | $3,060 | $6,120 |
| Total taxes | $3,249 | $11,160 |
* Child tax credit omitted because it does not change the net result.
Net Income Analysis
| Benson | Fraley | |
| Income – one spouse working ($40,000-$3,249) | $36,751 | $36,751 |
| Income – two spouses working | $80,000 | $80,000 |
| Expenses – two spouses working | ||
| — tax | $11,160 | $11,160 |
| — gas/car repairs/clothing | $3,000 | $3,000 |
| — day care | $18,000 | $12,000 |
| Total expenses | $32,160 | $26,160 |
| Net income – two spouses working | $47,840 | $53,840 |
| Net difference | $7,840 | $13,840 |
Once again, adding a lot of income does not make an equal impact on the bottom line.
Other Considerations
If you are having to buy a second vehicle for the second spouse so he or she can be employed, all of these illustrations show that the purchase would be a significant drain on the income from the spouse who is currently employed and most likely eliminate any financial benefits. The illustrations also do not factor in purchases for lunch for the second spouse, which could be saved by taking a brown bag lunch. There may be other expenses to be included in the illustrations depending on the prospective employment situation.
When both spouses are employed one may lose work when children are sick or off school. This would also reduce the bottom line impacts on the budget.
Some non-financial factors to consider include:
- Strain on your relationship at home
- Decreased quality of life with both spouses working
- Children being raised in the daycare center and not at home by the parent
- Children exposed to influences in daycare which you may not approve
- Not being able to volunteer at school or extra-curricular activities
- Not being able to participate in homework or school activities
These are factors which cannot be quantified or valued in terms of money. The question you have to ask yourself is whether the small amount of money needed from the second income is absolutely required. We would highly recommend that you be certain all other possibilities have been explored and exhausted, including cutting expenses, having a smaller or less expensive home, owning a less expensive car, etc.
After all, you would not want your children to believe you gave up your time with them and enrolled them in daycare just so you could afford a bigger home, more expensive car, boat, etc., would you? A feeling of guilt will not help you perform well as an employee and could further impair your relationships at home. Feeling guilty is certainly something I have heard from many working parents whose spouses are also employed.
In my experience in working with families in probate estates, there have been more instances than I could count where parents were estranged from their adult children, and it stemmed from their childhood years. Sacrificing children on the altar of success and status rarely ends well for the parents or the children, and we strongly encourage that you consider the possible long-term effects of the decisions you face today.
This is the value engaging a knowledgeable financial planner can bring to your decision making.
It is up to you to decide what is most important. Our job is to help you find a way to make your goals possible, and hopefully this article and the illustrations provided have given you a starting point in your decision making.
Before we leave this subject, there may be alternatives available which you could consider if more income is needed to keep your family afloat, such as:
- Spouse who is currently employed working additional hours/overtime or taking a new job that offers more salary growth potential
- Second spouse works a shift when the other spouse will be home
- Second spouse starts a business that can be operated from home or online
- Friends and family helping with child care (probably not a long-term solution for full-time employment, but may be for part-time)
- Home daycare, which can sometimes be slightly less expensive
- Seeking employment that offers daycare benefits
Notes:
For purposes of the illustrations in this article, deductions and credits which could be taken regardless of income were excluded since the net results would not be affected.
Daycare costs reflect the national average for 2019 taken from childcareaware.org. Daycare costs may be higher or lower in your locality.
Aftercare costs reflect the average for 2019 taken from childcareaware.org plus our estimate of the cost of full-time daycare, summer camps, etc. for children during the summer months.
