Your Family's Need for Childcare
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While the childcare decision is not usually strictly a financial one, it is easiest to start by tallying up the monetary expenses. First, calculate your household's tax liability. Figure your taxable income (including your spouse's, if applicable) by subtracting all deductions and exemptions to which you are entitled. Consult the IRS tax tables, found in the instructions accompanying Form 1040 or 1040A, to determine your tax. Then subtract from that amount all tax credits for which you are eligible. Add to the total any other taxes you may owe, such as FICA (Social Security and Medicare taxes) and state income tax (if any). This amount is your total tax liability.
To your tax liability amount, add the yearly expenses that you incur solely because of the fact that you work. These costs include the gas money you spend to get to work and the parking fees you would not have to pay if you did not drive every day. Add extra expenditures that you make for items such as work clothes and lunch that you would not be purchasing if you did not work away from home. Include in your total either the amount that you already spend or the estimate of what you would spend for your childcare arrangement.
After adding up taxes paid and work-related expenses incurred, subtract that total from your gross income. Now you have what this book will call your net cash benefit, which is the annual dollar amount you have, free and clear, as a result of your hard work.
- Example: In 2004, Hank and Wendy have two children, ages 12 months and 5 years. Hank earns an annual salary of $60,000; Wendy's is $40,000. Wendy has a short drive to work, and eats lunch out only a few times a month. As a result, she has only a little more than $1,000 worth of nontax, work-related expenses. The breakdown of their financial situation, both with and without the second income, is as follows.
|Assumption||Two Incomes||One Income|
|Less: Standard deduction and exemptions||($22,100)||($22,100)|
|Tax (according to tax table)||$12,956||$4,974|
|Less: Child Tax Credit and Credit for Child and Dependent Care Expenses||($3,200)||($2,000)|
|Net federal income tax due||$9,756||$2,974|
|Plus: FICA and State income tax||$10,450||$6,270|
|Total tax liability||$20,206||$9,244|
|Plus: Day care expenses||$13,000||n/a|
|Extra lunch/clothing expenses||$1,500||$1,000|
|Total work-related expenses||$36,311||$11,314|
When you subtract the combined work-related expenses from gross income in this example, you arrive at a net cash benefit of $63,689 for the two-income family and $48,686 for the single-income family. The difference in net cash benefit from giving up the second income of $40,000, therefore, is about $15,000.
More on: Childcare
Copyright © 2005 by Linda H. Connell. Excerpted from The Childcare Answer Book with permission of its publisher, Sourcebooks, Inc.
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