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Should Spouse Stay at Home with Kids OR Work?

I got a common young couple question from Fab (Cashflow 101 charity sponsor) a little while back about whether it's better financially for his wife to stay at home and take care of their children, or go back to work. Here is the question in more detail:

… for families with young age kids (like myself 2 kids aged 2 years old and 5 months) : is it better to have mom staying home or should mom work (full time or part-time) and then pay for childcare expenses, and more? I actually try to consider different scenarios for my family… to find the best financial choice obviously ;) ! My problem is I don't really manage to calculate what the tax consequences are the different scenarios… I live in Quebec, Canada. – If it helps, here are my 3 scenarios :

  1. I work full time week (69K gross), wife always home with 2 kids.
  2. I work full time (69K gross), wife home with 2 kids during the week and every other weekend works ($800 a month), no child care expense.
  3. I work full time (69K gross), wife works full time (58K gross), child care expense = $900 per month.

As you can see, this question is fairly involved. If we break it down, we can see the Fab plans to stay work, so the $69k gross income remains constant. With that said, here are the options:

1. Wife stays @ home with 2 kids, no income: $7,505 spousal amount can be transferred to Fab (could be slightly less than $7505 b/c of UCCB). Universal Child Care Benefit (UCCB) per child of $1200/year can be taxed in the hands of the lower income spouse. On top of that, they would receive a non-taxable Canada Child Tax Benefit (CCTB) of $157.16/month or $1885.92/year (CCTB Calculator).

  • After Tax Income Analysis (used taxtips.ca calculator)
  • Fab: $49,497 (for 2007)
  • Wife: $2400 (from UCCB)
  • CCTB: $1885.92 (assumed 18% RRSP Contribution)
  • Total After Tax Income: $51,897 $53,782.92

2. Wife works part time on the weekends making $800/month gross ($9,600/year) and with Fab taking care of the children during this time. Doing this will result in a loss of the spousal amount and a reduction of the CCTB to $125.16/month or $1501.92/year.

  • After Tax Income Analysis:
  • Fab: $46,318
  • Wife: $11,381(after tax with UCCB included)
  • CCTB: $1501.92
  • Total After Tax Income: $59,200.92

3. Both spouses work full time with a $900/month or $10,800/year child care bill (maximum $7,000/child). The lower income spouse can CLAIM this child care bill, which in Fab's case will reduce his wifes taxable income from $58,000 to around $47,200. The CCTB gets reduced to $28.14/month or $337.68/year

  • After Tax Income Analysis:
  • Fab: $46,318
  • Wife:$34,772 (net after claiming child care costs and adding UCCB)
  • CCTB: $337.68
  • Total After Tax Income: $81,427.68

In my opinion, if you're looking at this scenario at a purely financial point of view, then it's obvious that having 2 working parents is best after tax.

In scenario 2, it seems that working part time will result in a > 50% taxation where she would be working earning $9,600 but/ only bringing home $5,546.36! So unless the $5.5k / year makes a real difference in your situation, I would forget about working part time.  I think the real question though is for Fab to analyze his current expenses and find out if he can afford to have just one spouse working or not.

Whew, that took a bit of research! Fab, you owe me a beer! Anything to add? Perhaps some of you who are in similar situations can comment. Props to Canadian Dream and Canadian Capitalist for some pointers to help answer this question.

Update July 08, 2007: I've written an article to explain the Spousal Amount, Universal Child Care, Child Tax Benefit, and other child care tax deductions in more detail. Please note that I'm not an accountant, or financial advisor. Please follow the advice above at your own discretion.

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32 Comments

  1. Canadian Capitalist on June 27, 2007 at 9:01 am

    In scenario 3, the lower income spouse can only claim $7,000 per child of child care expenses.

  2. FrugalTrader on June 27, 2007 at 9:04 am

    Hey CC! Ok, thanks for the heads up! It works in this case if assuming that both children get chidcare for $900/month or $10,800/year total?

  3. Canadian Capitalist on June 27, 2007 at 9:13 am

    FT: Like I mentioned in the email yesterday, I have a couple of points to add. I’ll post my thoughts tonight. Cheers!

  4. Canadian Capitalist on June 27, 2007 at 9:17 am

    $900/month for two kids? Wow, daycare is so cheap in Quebec. I saw $900 and assumed it was one child!

  5. Canadian Capitalist on June 27, 2007 at 9:29 am

    There is one other wrinkle in this calculation. The Canada child tax benefit would be more when the spouse stays at home. Don’t worry though. I’ve covered that financial angle in my post.

  6. FrugalTrader on June 27, 2007 at 9:32 am

    so a stay at home spouse would receive the child tax benefit on top of the $1200/year/child universal child care benefit?

  7. FrugalTrader on June 27, 2007 at 9:39 am

    I just found it online,
    http://www.cra-arc.gc.ca/benefits/calculator/menu-e.html

    Going to fix up the article including the CCTB.

  8. guinness416 on June 27, 2007 at 10:38 am

    There’s also the issue of family income when she goes back to work. The “heavy lifting” childrearing years only last 10 or 15 years. I’d consider working out what hit the family (retirement funds, college funds, net worth) will be taking a decade or so from now when the kids don’t need/want her constant attention & she tries to get back into the workforce too, versus staying in. But I think you may need a rest from the calculations!

  9. Lewis Empire on June 27, 2007 at 12:12 pm

    I’m surprised you’re comfortable publishing your income online.

  10. David on June 27, 2007 at 12:17 pm

    Another point that has nothing to do with the financial aspect: IF either spouse is in an industry where maintaining professional currency is important, exiting that field for the years of child rearing may leave that individual with an outdated, unmarketable skill when they wish to re-enter the workforce. In this instance, the part time job may ensure retention of the skill set, and has far more value than the income alone would suggest.

    DAvid

  11. Fab on June 27, 2007 at 12:47 pm

    Wow! What a surprise to see this post on milliondollarjourney this morning… FT, I realize you worked hard on this one! Thanks a lot!

    – Canadian Capitalist, the $900 can be explained like this : my younger kid can obtain a quebec $7 per day daycare (called CPE / governement daycare) so that’s around $150/month + regular private daycare at around $34 per day for my 2 years old which is around $700 / month + few expenses…
    Hard to obtain a $7 for my 2 years old, it’s very long waiting list to get a spot… my 5 month old was registered for a spot at least a year before his birth! ;)

    Well not a huge difference in between scenario 1 and 2… I’m going to work on undertanding all these calculations.

  12. FrugalTrader on June 27, 2007 at 12:50 pm

    Fab, let me know if you have any questions. Again, you owe me a beer when I visit Quebec. ;)

  13. guinness416 on June 27, 2007 at 1:03 pm

    That’s what I was trying to get at in number 10 David, but you phrased it better! In addition to part-time work in your field, it’s been suggested that volunteering in a very relevant way (eg, a marketing person preparing a business plan for a local non-profit or something) can help “keep your hand in” and get a job after those few years, but you’re still taking a kick in the pants as far as salary/net worth will go.

  14. Fab on June 27, 2007 at 1:12 pm

    FT, no problem! I would be happy to offer a few beers! ;)

  15. Canadian Dream on June 27, 2007 at 2:17 pm

    FT,

    Nice job on the calculations. I think you covered it all.

    I would like to point out that another option out there is to run your own daycare out of your home. That way your daycare cost is $0 and you get some extra income with the advantage of it being a small business so you can write off your expenses. That’s what my wife does and she loves the work.

    CD

  16. FrugalTrader on June 27, 2007 at 2:21 pm

    CD, is there much to getting a daycare license?

  17. FourPillars on June 27, 2007 at 2:41 pm

    I find it interesting that the CCTB calculation uses your net income. In other words the more you contribute to your rrsp, the lower your net income will be and the more CCTB you will get.

    Another reason I love rrsps!

    Mike

  18. Canadian Dream on June 27, 2007 at 4:14 pm

    FT,

    It depends on your province. We found BC way easier than SK to get a daycare license. BC it consisted of a pile of paperwork and a few inspections. While SK there was also an interview process which I had to be involved with and even paperwork for me. You will also need criminal records checks and typically some sort of related education or the intent to get that education.

    The pay off of getting a license is free advertising from the government (they usually have a list of places with a license) and typically you can apply for various grants to help cover some start up costs or even operating costs. For example, in SK once we got the license my wife got a $700 grant to buy/upgrade her equipment.

    Typical startup costs can be cheap. I think the first daycare my wife only spent around $2000 total.

    CD

  19. FourPillars on June 27, 2007 at 4:23 pm

    I thought you only need a license if you’re looking after more than five kids?

  20. Canadian Dream on June 27, 2007 at 4:32 pm

    Mike,

    It depends on where you live. For example in BC you could only have two (if my memory is correct) and in SK you can have up to 8 without a license.

    A license is typically not needed for smaller number of kids, but it does bring a certain amount of trust to a new facilty when you just start out.

    CD

  21. The Financial Blogger on June 27, 2007 at 8:33 pm

    If you operate a small daycare in Quebec, you don’t need licence. However, CPE (government daycare) licences are harder to get. Actually, I’m not even sure they are giving more as this system cost so much!
    It’s amazing to have 7$ daycare but I don’t think that we (Quebec) can afford it. Thanks to Alberta and BC that send money to us!
    Cheers,
    FB.

  22. Stay at Home with the Kids or Work? on June 27, 2007 at 9:46 pm

    […] Million Dollar Journey posted about the financial angle of one of the parents opting to stay at home with the kids. I only have one minor point to add to his analysis: You’ll also have to account for the Canada Child Tax Benefit (CCTB), a tax-free monthly payment made to eligible families with children under 18. The CCTB is based on your family’s net income (line 236 of your tax return), which for most people would be total income less RRSP contributions, child care expenses, loan interest deductions etc. […]

  23. Canadian Capitalist on June 27, 2007 at 10:00 pm

    FT: As I mentioned in the email, I followed up with a post on our experience on this subject. For us, it wasn’t mainly a financial decision. My wife would have been miserable being a full-time mom and not working at least part-time (we might still go the part-time route in the future).

    Our CCTB calculations seem to come out differently. How did you calculate net income for the calculator? I used 69K – 18% RRSP contribution for scenario 1 and 58K – 18% RRSP contribution – $10,800 child care expenses for the spouse’s net income in scenario 3.

  24. AJ-IAmFacingMillions.com on June 28, 2007 at 1:31 am

    There’s a lot more to consider than merely the financial aspects of this. How much of a difference would it make in the children’s lives and the quality of the life for the entire family?

    Even from a purely financial standpoint, what about costs associated with the job. If nothing else, gasoline is so how these days that unless you work really close to home, that can be substantial over the course of a year.

  25. FrugalTrader on June 28, 2007 at 8:54 am

    Hey CC, Yes, I made a mistake. I put in the “after tax income” as the net income in the calculator. OOOPS! Going to fix the calculations now.

  26. Fab on June 28, 2007 at 10:41 am

    I agree, the choice to be made is not only about finances. But when deciding, the financial aspect comes first unfortunately! We don’t quite know what we will do yet… :
    – both working would probably transform life into a stressing running after schedule kind of thing
    – wife staying at home 100% is a full time job in itself and it could be too much at times for her…

    We need to explore the idea of creating a private daycare for as long as we want to keep our kids home! Like said, it could be a small business with the advantages that brings… it could give the kids the opportunity to be with other kids as well… interesting!

    Thanks again to all for these efforts in calculating / debating the topic!

  27. […] If you’re wondering what the numbers look like, the personal finance blog Million Dollar Journey, has crunched them for you. The article assumes two kids and one parent making $69,000 annually, and considers three scenarios: wife at home with kids full-time, wife at home with kids working part-time on weekends, and both parents working full-time with the kids in daycare. It turns out that having both parents working full-time yields more after tax income in your pocket. It probably helps that the parents live in Quebec with its heavily subsidized child care system. So I was wondering what the numbers would look like in British Columbia… […]

  28. David Magda on July 7, 2007 at 2:47 pm

    Another thing that is not mentioned: if the wife is not working, what about her retirement plan?

    This can affect her down the road unless you have a share planned. Is it possible to take spousal RRSP conrtibutions into account (or have they already)?

  29. FrugalTrader on July 7, 2007 at 2:56 pm

    David, I have RRSP’s accounted for in the net income calculations above. In spousal RRSP’s, the contribution amount is limited by the contributors contribution limit (18% of previous years income).

  30. […] sure to take advantage of all your child care tax credits. Check out a case study that I wrote […]

  31. Cross the River on December 11, 2007 at 10:22 pm

    FT

    One problem about the 7$/day daycare. You got to put your kid’s name on a waiting list before he/she is born and sometimes, you’ll still be waiting many years before you get a place.

  32. […] FrugalTrader05:00 am16 Comments Permalink Last week, I answered a reader question regarding whether it was better financially for one spouse to stay at home with the kids, or for both parents … From within the answer that I put together, I mentioned the Spousal Amount, Day Care Expenses, […]

  33. Randy on March 5, 2008 at 12:13 pm

    I NEED HELP!

    We are expecting our first child in june.My wife wants to still work fulltime as a (teacher)that pays around 42,000 a yr.My income is around 45,000 a yr.

    She has the advantage of doing job share which is part-time in her company. That is what i would like her to do, but she thinks we couldnt afford it.Our rent now is $300 a mnth, plus some some bills that equal around $1000 a mnth. Her biggest thing is she wants to buy a house asap and wants to put $down.

    The question is ….should my wife work full-time or job share part-time?

    • FrugalTrader on March 5, 2008 at 1:10 pm

      Randy, that is a very personal decision. By the looks of things, you have your expenses under control and shouldn’t have a problem with 1 income. You also have to account for childcare expenses if both of you were to work full time. AFAIK, most daycares won’t even take newborns.

  34. Judy Satin on May 17, 2008 at 8:23 pm

    I don’t know about the parents’ FINANCES, but this anti-daycare website states it’s not better for the kids’ WELL BEING….
    http://www.daycaresdontcare.org

  35. […] summarize the email, the reader is basically stating that we’re putting making money ahead of getting the best care for our children. I guess since I fully disclose everything about my financial life, it may seem that all of our […]

  36. Pam on February 26, 2009 at 2:23 pm

    Wow how lucky are you to only have to pay $900 for daycare for 2 kids, I pay $1100/month for one kid here in Newfoundland, and my wages are probably half od what they would be in Quebec.

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