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Wednesday, July 18, 2007

Just Some Rough Numbers: a Tax Tutorial

A commenter asked me to work out the numbers regarding the family in my last post who make $280,000 in combined income and pays $120,000 in tuition. Tax often baffles the average citizen, so I think this is a useful exercise.

Hopefully the original commenter can post up exact demographic information. But in the meantime, I assume the following whih I believe are all reasonable assumption.

--10 exemptions (2 parents + 8 children). I assume eight children as $120,000/$15,000 average tuition = 8.
--Each parent works full time and pays for child care (i.e. camp) during the summer, giving them a small state dependent care credit and a $1200 federal credit.
--Each parent makes enough to pay the maximum amount of FICA tax, i.e. $5840. For simplicity, I assigned $180,000 to the father and $100,000 to the mother.
--No income is deferred for retirement and there are no other sources of income.
--They live in a high tax state where there is a large Jewish community. Some high tax states I can think of include New York, California, or Maryland.
--For ease, I assume no charitable contributions and no mortgage interest income, but itemized using only state tax paid. With or without additional itemization, the family gets hit with the AMT due to the number of exemptions. Additional itemization could lower the tax bill at the federal and state level. So, there could be an addition $10,000 or so more for the family. It really doesn't change the theoretical per se.

Combined Salaries: 280,000
FICA, $5840*2 11,680
Medicare, 1.45% 4,060
Federal Tax, after credit 65,286
State Tax 19,000 (varies by state, this is a fair estimate)
Take Home Pay $179,974

Take away tuition of $120,00 and this family of 10 has less than $60,000 to pay the rest of their expenses. Between rent/mortgage, food, medical care, additional childcare and camp so the parents can work, basic clothing, and utilities, I can only imagine that a large family making over a $280,000 needs a helping hand.

(If that commenter emails me at Orthonomics, a gmail account. I can adjust assumption accordingly).


Ari Kinsberg said...

i think i will just sit back and enjoy as the accounting nerds-nothing personal of course--duke this one out.

SephardiLady said...

For income on the books via an employer, I don't know that there is that much to duke out.

Anyone could plug in the numbers. Turbo Tax would work just fine for this exercise. :)

Anonymous said...

holy crap.
im not in the tuition parsha, but is it really an average of 15k per kid!? in what school? the standard east coast rw yeshivas i know charge roughly half that, certainly less than 10k .
what school charges a parent of 8 15k per kid -- especially assuming that a number of kids attend the same school so the family gets a reduced tuition?


SephardiLady said...

Fred-Where I live, there is little difference between the prices at all of the schools and by middle school you will be paying $15,000.

In NY, the RW schools are far less, but I think many of them are creeping up to $10K for elementary. The more Modern Schools have a more modern price tag.

Honestly Frum said...

In the outer NY suburbs even the RW yeshivas cost close to $12,000 for elementary school (all in, including dinner, scrip, registration, building fund). My kids are in an MO school and the cost is also about $12K for elementary. One thing that helped is that I was able to pay off my building fund in full while my son was in nursey; I got a tax break for it b/c it was not yet an obligation and it will lower my costs going forward. I believe the medium cost of tuition in my area is about $12-15K per child in elementary school and 15-20K for highschool.

Shmilda said...

If that family lives in the NY or NJ suburbs they are also hit by high property taxes on top of a likely large mortgage, and if they live in New York City itself they have the privilege of paying the city income tax (combined with NY State, it quickly maxes out at around 12%).

On the other hand, if they live in the NY or NJ suburbs, I wouldn't be surprised if he earns close to $280,000 in medicine/law/accounting/banking/trading and she either stays at home and works part time in a low salaried field. Though I suppose that wouldn't significantly change the equation.

Ezzie said...

Assuming they own, their mortgage would knock down the taxes a nice amount. I would assume other deductions as well... but the basic point still stands. That's scary.

Honestly Frum said...

We live in an outer suburb and have a medium size mortgage (nowhere near $500K) but our property taxes are crazy. And although some of the money comes back at tax time the 40% is taken out before the refund. most months after 401K, medical insurance and taxes I take home less than 50% of my paycheck. Ends need to be met between April and April. $150,000 in an outer suburb has most families with 2 kids in Yeshiva strugling, if they get by at all. Between a mortgage, car expenses, food, shul dues (could run over $1500 in some shuls)and tuition there is very little left for much else. But b/c one is earning $150K it is unlikely that they will be eligable for financial assistance from the school which leads them to ask their parents for help. BH we are able to survive without outside help, but I am not sure how many people in my community do it without help from parents or the such.

SephardiLady said...

Ezzie-Like I wrote:

"Additional itemization could lower the tax bill at the federal and state level. So, there could be an addition $10,000 or so more for the family. It really doesn't change the theoretical per se."

They are hit with the AMT no matter what.

Scraps said...

Hashem yishmor. How can anyone afford to have kids anymore?! :(

Those numbers are downright scary.

Mike S. said...

Of course, the family could save money by hiring a teacher instead of sending the kids to Yeshivah. $100K would probably be enough to hire a good teacher, paid legally (i.e. on the books) with health insurance.

Jameel @ The Muqata said...

With $280,000 in combined income, sounds like they could be the sort of professionals that could get decent jobs in Israel...and make ends meet easier.

Just a thought :)

triLcat said...

jameel: my thoughts exactly.

The tuition crisis in the US has really made life in Israel seem much more appealing...

Tamiri said...

RE Israel: don't kid yourselves. Doctors here don't make much until they are senior enough to see patients privately and it would take an Oleh a while to qualify - they must to through internship before being able to pass the medical boards here.
Lawyers: IF they have a minimum of 5 years under their belts (before that there are restrictions) they can do a 1/2 year internship then hope to get "a job". Not a mega-job, just a job. What the future holds for them is in Hashem's hands.
Hi Tech: probably the most well-paid area, generally speaking. The highest paid programmer is likely not netting more than $5K/month and that would be so rare as to make people laugh to hear it. Usually they net around $3K, and even that is pretty generous.
Business people: the sky is the limit. Or, they could be earning nothing.
Dentists: Can do very well, or not. They either have a successful office they built up (after going through Israeli boards etc.) or they work for a clinic (not good pay) or both - to be on the safe side.
HOWEVER, you need a LOT less to live here. Tuitions do cost, and they do tax the average ortho family but somehow, it doesn't seem as back breaking here.
Looking into Aliya should be a viable option for all Jews and particularly for the Torah Observant ones who are looking to do mitzvot :-)
I would suggest that young couples view this option before they get mired in the muck.
Oh - and there is also the travelling option, where one spouse keeps their U.S. job so as to keep the family flush, and the rest live on the wealth earned there. This option works for many many recent Olim. Then you can have your cake and eat it too, and not share with Hebrew Day Schools. Ah mechayeh.

Juggling Frogs said...

This situation is something to remember when soliciting funds for tzedaka.

While the charitable donations are not deductible, they still have to be made. It is a basic line item in every frum family's budget.

Yet, sometimes, people judge those with large salaries because they 'should be able to buy the gold page' in the XXXX adbook, etc. This can cause pain and embarrassment to the family that is inaccurately perceived as withholding a larger participation in a particular tzedaka by choice.

Despite their prestigious careers and high salaries, they may be struggling to give what they do give now, and wish dearly to do more.

Anonymous said...

I guess I should be grateful that the tuition bill for 4 school age kids is 'only' about $70k!

AMT is a killer. We have 5 kids and have been subject to it for years now.

It kicks in well below $280k when you have a large family.