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 :
- I work full time week (69K gross), wife always home with 2 kids.
- 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.
- 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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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.
[…] 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 […]
I don’t know about the parents’ FINANCES, but this anti-daycare website states it’s not better for the kids’ WELL BEING….
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 $down.
The question is ….should my wife work full-time or job share part-time?
Randy, that is a very personal decision. By the looks of things, you have your expenses under control and shouldn’t have a problem with 1 income. You also have to account for childcare expenses if both of you were to work full time. AFAIK, most daycares won’t even take newborns.
[…] FrugalTrader05:00 am16 Comments Permalink Last week, I answered a reader question regarding whether it was better financially for one spouse to stay at home with the kids, or for both parents … From within the answer that I put together, I mentioned the Spousal Amount, Day Care Expenses, […]
One problem about the 7$/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.
[…] sure to take advantage of all your child care tax credits. Check out a case study that I wrote […]
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).
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)?
[…] 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… […]