What Happens if it Costs Too Much to Work?

June 21, 2007

Today’s WSJ contained the following letter to the editor:

Your June 14 editorial “100% Marginal Tax Rate” caught my eye, as that reality is, in effect, already here for us. Two years ago I came to the conclusion that it was actually costing me money to go to work. As a two-physician couple with two children, we required daily child care in order for both us to work, given our hectic schedules. That child care can only be purchased with pre-tax dollars. Given our dual income, every dollar I earned was taxed at an effective top marginal rate of 51.15% (35% federal, 1.45% Medicare, 6.2% Social Security, and 8.5% state). But it only got worse as we were swept into the Alternative Minimum Tax bracket as well. Living in such a high tax state as Maine, where property taxes and income taxes are some of the highest in the country, exposed us to the AMT tax as our federal tax deductions consist mostly of property tax, excise tax and state income tax payments.

The “Bush tax cut” is a myth, at least for us, as the AMT tax is costing us more money than the small decrease in the top marginal rate returned to us. The more I worked, the more state taxes I paid and the higher the AMT burden became. As an emergency physician, I found that after the state and federal governments took their share along with the AMT tax, I wasn’t making enough money to pay our child-care expenses with pre-tax dollars. Add to that the constant threat of being sued as an emergency physician, it only made economic sense for me to quit my job and take over child-care responsibilities full time. Now I no longer work as an emergency physician or employ a child-care provider (and pay her employment taxes), and our after-tax take-home pay has increased. Who says this isn’t a great country?

J. M., M.D.
Brunswick, Maine

This is what makes the AMT so ridiculous. Since under the AMT, you pay which ever tax bill is the highest, a tax cut could actually force you pay the AMT. Crazy isn’t it?

I wonder how many other families are coming to the same conclusion?

11 responses to What Happens if it Costs Too Much to Work?

  1. This happens not just for those hitting the AMT, it happens on the low end as well. If you include the costs of a second car, insurance, gas, day care, “work clothes” it makes sense for a mom making minimum wage to stay home (or find a better paying job).

  2. Yet another perk of owning an online business. No need for gas or another car. No need for work clothes since you can walk around in PJs all day, no need for daycare.

  3. Long ago, we decided that it really did not pay for my wife to earn a salary. We too live in NYC, an extremely high tax region, and are subject to AMT. She now works for herself and the business deductions are a big help come tax time.

  4. I think if many parents included all of the costs associated with working (the ones Debt cites, for example), and saw what they’re really making by doing so, we’d see a lot more stay-at-home moms and dads.

    You don’t have to be losing money as the writer of the letter to the editor is. But you might reconsider working when you realize after all expenses you’re bringing in $200 every two weeks in exchange for all the crap you put up with at work.

  5. It is hard to think that a medical doctor would not max out Fica and Medicare during the year, so I doubt if they really were in that high a tax bracket.

  6. Dave,

    Actually, you don’t ever max out Medicare, which is something like 1.45%.

  7. They were being a bit aggressive in their discussions, but only somewhat. And they only counted the “employee’s share” of SS and Medicare, when in truth the “employer’s share” is part of your salary, but is magically invisible – after all, pointing out to the nation that it’s paying 7.2% more in taxes than it thinks it is would be difficult…

    My wife’s aggregate tax bracket _is_ close to 50% on her self-employment income.

  8. JLP, you are exactly right re: Medicare at 1.45%. For everything you ever wanted/(did not want!) to know…follow this link. PS $97,500 is the 2007 max. earnings cutoff for OASDI. When will the government take THAT away from us?!!

    http://ssa-custhelp.ssa.gov/cgi-bin/ssa.cfg/php/enduser/std_adp.php?p_sid=yKUXmi2h&p_lva=&p_faqid=310&p_created=959284761&p_sp=cF9zcmNoPSZwX2dyaWRzb3J0PSZwX3Jvd19jbnQ9NjM3JnBfcGFnZT0x&p_li=

  9. It’s not just in the US that couples find they can’t afford to both work. Here in the UK, we have a top income tax rate of 40 per cent, with National Insurance at 9 per cent. Even couples who pay basic rate tax (22 per cent and 9 per cent)often can’t afford to both work and pay childcare costs. Of course, some people simply don’t want to work – and the state has a role to play here too. I was reading a magazine article in my doctor’s waiting room this morning about a guy with 14 kids who gets £26,000 a year in state welfare payments (over $51,000) and a low-rent house from his local authority. No wonder he can’t see the point of going out and getting a job. Sometimes it seems like the whole world’s gone crazy.

  10. There are new medicare plans for 2008. I would strongly recommend reviewing your current plan each year as there are sometimes dramatic differences. If you think outside the box you will find some great health plans. The big companies such as Blue Cross will charge whatever they want because they assume people will just go with the name and they spend a ton of money on advertising which reflects in the premiums and benefits. If you look at some other companies you may be pleasantly surprised with the benefits you will find.

  11. I realized a few years ago that it was better for me to QUIT my job in Oct of each year, take the holidays off, visit family during Thanksgiving and Christmas. Then after the New Year, I would start sending my resume out to new companies and I have NEVER ONCE had a problem finding a new job. A few times, I have left and then went back with the same employer.

    This is great because I discoved that the last few months of the year I was ONLY working to pay taxes!! Now that I quit each year, I reduce my income to the point I get a REFUND each year. The only hitch is I have to save up enough during the year to live on from Oct – Jan but with Christmas gifts and eBay it has always been easy and the time with family is priceless.