As a good progressive liberal, I’ve always dismissed the conservative trope that high marginal tax rates create a disincentive for high-income workers, so much so that they refrain from seeking additional income due to how much it goes to taxes. (Though I have seen plenty of anecdotal claims within the reader comments on the White Coat Investor site.) And I hate to come off as the moderately well-off guy whining about my taxes and college costs. Or, even worse, sounding like “Susan” in this post from Chief Mom Officer.
Yet in my initial explorations about expected family contributions (EFC) for college tuition, I’ve been shocked by just how much parents are expected to pay each year, even at fairly modest income levels. Of course, the more you make, the more you’re expected to contribute. Hence, you can compute a marginal rate for your “tuition tax.” That is, for every dollar in additional family income, how much more are you expected to pay in college costs via your expected family contribution?
I did a quick calculation this morning of our marginal college contribution tax rate using the figures from the expected family contribution table in this Forbes article by Troy Onink.
With two dependent children, it appears that there’s an approximate marginal 31% tax for folks in our current income range. Every dollar increase in our adjusted gross income equates to an additional 31 cents in our expected family contribution toward college tuition.
And when you add that percentage to the other taxes we pay, we end with an eye-popping overall marginal tax rate. Assuming no changes in our federal and state income tax rates, we’ll have the following marginal tax rate starting in 2021, the tax year that will be used to determine our EFC for my daughter’s freshman year in college:
31% — increase in expected family contribution
28% — Federal income tax
6.2% — FICA (Social Security)
4.95% — Illinois income tax
In theory, you wouldn’t count FICA as part of the marginal rate in a single-earner family in our tax bracket, as you would have already hit the annual limit. But we only get to the 28% bracket due to having two earners in the family, so I’m including it here.
Beyond taxes, we have other costs associated with two full-time workers — such as paying for a dog walker to come on weekdays, commuting costs, etc. — which push the effective marginal rate on a second salary even higher.
Of course, as long as the marginal rate is less than 100%, we’re still better off financially with the second salary. Yet it’s starting to seem like a pretty poor financial trade-off in terms of time (both the work hours and the commute) and stress.