I watched a television program a few years back about finances and a young couple who where trying to save money to buy a home. The husband had a full time job and the wife worked part time. The wife's part time income tossed them into a higher tax bracket. As it was calculated out, they would have actually saved money by her not working. I think they might have had some child care expanse as well, but not really sure. Upon hearing this, the young women broke down in tears and said you mean I have been working for nothing? My heart felt for this couple and got me wondering about myself who always quickly volunteers for overtime. Am I doing the same as well?
Then it was calculated wrong. Addtional income taking you to a higher tax bracket CAN't end up costing more in tax than the additional income. The original income (without the extra, whether it's from a second job, overtime or a spouse's job) would still be taxed the same. The additional income would be taxed at a maximum rate of 35%, and to be that high your total income would have to be over $300K. Add in 7.65% for social security and medicare, state tax that could range from 0 to around 10%, and you'd still be keeping around half of the extra income or more, even if you're making hundreds of thousands per year - for normal people, the tax bite wouldn't be anywhere near half. You need to read up on how tax brackets work. As an example, a married couple filing a joint return in 2006 with $61,300 taxable income is in a 15% bracket. They'd pay 10% on the first $15,100, and 15% on everything over that, for a total of $8440. Earn an extra $10 and they're now in a 25% bracket, but they only pay the 25% on that extra $10, the tax on the first $61,300 would still be the same $8440, plus 25% of the extra $10 which would then total $8442.50. You very casually mention there might have been some child care expense - and that can definitely be a major consideration. If someone is making $8 an hour but paying $6 an hour for child care, then it probably isn't worth working - but that's not anything to do with taxes.
You don't go backward here. If working overtime puts you into a higher tax bracket it means you will pay a little more on the extra income. You will still have more than if you had not worked overtime. What could have happened for the couple you mention is that the non-tax costs, things like commuting and child care, are more than the extra take-home pay.
In most cases, Yes. It comes down to opportunity. Any hours you work overtime you are getting less of a return once you jump into a higher tax bracket.
No your case is different from the TV program. Your extra costs of overtime are minimal. You don't have an extra commute, extra clothing, extra child care to pay for. Plus, if your earnings take you over $97,500, you won't pay SS and Medicare taxes. Also, you may qualify for a higher contribution to your 401k. Your overtime is helping you financially even after taxes. The mother working for $8 an hour, placing the family into the 25% tax bracket, and paying $6 for child care, is losing money.
