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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 11563
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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We are thinking about moving to the U.S. and I am looking at

Customer Question

Hello -
We are thinking about moving to the U.S. and I am looking at a job offer at a moment. To figure out whether or not it makes sense from a financial point of view, I need to understand what my actual paycheck looks like. Can you help me?
So, let's say I'll make $150k and I have a wife (not working) and two kids (4 and 1) .
- What would my net income after federal, state tax (CA), FICA, etc. be?
- One of the kids would go to daycare $20k/year - how much is deductible, how would that affect my net?
- We'd spend $4k/year for health care (out-of-pocket max) - how much is deductible, how would that affect my net?
- How many allowances do I claim (what the heck anyway?)
- Do FSAs do affect the net income or only whether I have to pay taxes in the first place and claim it back - or not?
Thanks a lot!
Submitted: 6 months ago.
Category: Finance
Expert:  Lane replied 6 months ago.

Hi. My name's Lane ... I can help here.

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I'll work backwards ... We have a progressive tax system here. There is the standard deductoin - an automatic reduction of income subject to tax - OR itemized deductions (only makes snese to itemize using Schedule A if the total of your itemized deductions are more than the standard deduction (standard deduction for filing jointly is a little more than 20,600. And thebn everyone gets a 4050 personal exemption ... SO, your TAXABLE income will be lowered by (12600 + (4050 x 4)) = 28800

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Here's what the progressive tax brackets look like (remember to subtract at least that 28800, to get TAXABLE income) for those married filing jointly

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Married Filing Jointly or Qualifying Widow(er) Filing Status

[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

  • 10% on taxable income from $0 to $18,150, plus
  • 15% on taxable income over $18,150 to $73,800, plus
  • 25% on taxable income over $73,800 to $148,850, plus
  • 28% on taxable income over $148,850 to $226,850, plus
  • 33% on taxable income over $226,850 to $405,100, plus
  • 35% on taxable income over $405,100 to $457,600, plus
  • 39.6% on taxable income over $457,600

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Next, Yes, the FSA reduces your taxable income as well. So to measure their effect we need to look at that theydo to those incremental tax brackets.

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Bear with me and I'll run a model that shows your taxes

Expert:  Lane replied 6 months ago.

OK, I've attached the projection O(formatting didnt transfer well here

Expert:  Lane replied 6 months ago.

Please let me know what questions you have from here.

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But if this HAS helped, and you don’t have more questions on this, I’d appreciate a positive rating (by using those stars on your screen, and clicking submit) … Otherwise JA won’t compensate me for the work.

Thank you,

Lane

I have a Law degree with concentration in Tax , Estate & Corporate Law, … an MBA, with specialization in finance … a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Customer: replied 6 months ago.
First of all, thank you for the quick response.
Just to fully understand this: So, basically, it does not matter tax-wise whether we'd spend 20k on child care or not, right? (I'm just asking bcs over here in Europe child care is not only subsidized but also tax deductible up to a certain amount.
(only the FSA does matter but that one is limited to 5k for dependent care...)...
Expert:  Lane replied 6 months ago.

That's right. In this system you can EITHER use the FSA OR take the Child Care Credit (but not both)

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Generally speaking, those with less than a 15% tax bracket will be better served by the Dependent Care Tax Credit. IRS Publication 503 "Child and Dependent Care Expenses" provides full information about this tax credit and offers worksheets and aids for performing the calculations.

Specifically:

  • If you are earning a moderate to high income, and particularly if you are filing taxes as "Married, Filing Jointly" (combining incomes with a spouse), the Dependent Care FSA is probably more advantageous. Reasons: Your tax bracket is probably higher than 15%, the threshold generally regarded as the dividing point between the Dependent Care Tax Credit (best for those earning LESS) and the Dependent Care FSA (best for those earning MORE).
  • Logically, if you have 1 child, the $5000 available through the Dependent Care FSA is probably more generous than the credit arising from the $3000 limit imposed by the Dependent Care Tax Credit. (See section on Dependent Care Tax Credit, above.)
  • Finally, the FSA saves not only income taxes (federal and state), but social security taxes as well. There are no social security tax savings offered by the Dependent Care Tax Credit. (Note: Your social security benefits could be slightly reduced by paying less social security taxes.)

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Some assistance is provided by the IRS Publication 503 "Child and Dependent Care Expenses", which provides full information about the tax credit and offers worksheets and aids for performing the calculation.

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One additional note: Because you have more than one qualifying dependent and qualifying expenses in excess of $5,000, it may be possible to be reimbursed the maximum amount of $5,000 through the FSA and take a Dependent Care Tax Credit based on excess expenses up to $1,000.

...

Lane

Customer: replied 6 months ago.
Thanks again, Lane!
The publication you referred to (IRS 503) says that both spouses need to have income to qualify for the child tax credit (and I think this applies as well to the FSA). Since my wife would be on an H4 visa she wouldn't have a work permit and not make any income at all. So does this mean what we discussed before is obsolete, or is there any exception for this situation?
Best
-Jens
Expert:  Lane replied 6 months ago.

Yes, so sorry, I assumed that you understood the policy behind the incentive (thatboth work so that child care is necessary)

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The FSA is effectively limited as well, becasue, even though it is not a requirement that both you and your spouse are employed (or disabled), reimbursements from your Dependent Care FSA cannot exceed the lower of your or your spouses (if married) earned income. This means that to make a Dependent Care FSA work, you both need to be employed (or disabled).