Ah, money, a pocketful isn't so bad

Perks: There are certain advantages to earning less, but, all things considered, don't go in and ask the boss for a pay cut.

Dollars & Sense

October 03, 1999|By Robert Little | Robert Little,SUN STAFF

If only you didn't make so much money.

Your mortgage rate would be lower. Your kids could get college grants instead of college loans. The tax man wouldn't dig so deep into your pockets.

There are plenty of government breaks out there that can help you cut expenses, but it seems they all evaporate as soon as your annual income establishes a firm footing in the middle class.

Well, financial advisers have some advice: Get over it.

No matter how much you wish you could take advantage of the government perks for the less endowed, you're better off if you don't qualify.

"At some income levels, the rules and regulations of all the government programs that crop up could benefit you more if you make less money," said Robert Moses, a financial planner with Raymond James Financial Services in Baltimore.

"But I haven't told a client yet that they need to make less money. I don't think that would be good advice."

Money won't buy you happiness, but as far as taxes, investments and quality of life are concerned, you're almost always better off with more than less.

When you're griping about your tax bracket in April, remember that a higher income lets you buy a bigger house and deduct more interest. Your 401(k) is growing faster, too. The alternative minimum tax might kick in if you qualify for too many deductions, but not until you surpass the $150,000-a-year range -- and you should be investing by then.

The Internal Revenue Service raises your marginal tax rate when your income increases. So a raise might take you from, say, the 28 percent bracket to the 31 percent bracket. But those tax brackets are so meaningless that tax advisers hardly pay attention to them. What matters is your effective rate -- the percentage you pay after credits and deductions. And people with more money have more opportunity to control their effective tax rate.

"Generally speaking, if you make more money, your effective rate is going to rise," said Ben Lewis, a tax specialist with Abrams Foster Nole & Williams in Baltimore.

"But there's really no magic ceiling -- no point where that extra money is costing you too much to be worthwhile."

The only exceptions, Lewis said, are for low-income earners, retirees and anyone considering a marriage.

People near the poverty level might actually bring home more money from welfare than work, when expenses such as child care are factored in. And the federal earned-income credit is so generous for low-income taxpayers that it can act as an incentive to keep your income low -- it generally far exceeds any raise you would be likely to get.

Retirement-age workers eligible for pension and Social Security benefits should make sure that their income from working isn't less than their potential retirement earnings.

And the federal government's "marriage penalty" can make taxes cheaper for single people than married ones.

But the key to taking advantage of government programs and tax breaks, advisers say, isn't to conform yourself to them but to seek out those for which you qualify. Low-income earners typically have more options, but others exist.

The homebuyer-assistance programs offered by the state's Community Development Administration all have maximum income requirements.

In Baltimore County, for instance, a family of three must make less than $66,470 to qualify for a 4 percent home loan. And the house can't cost more than $140,634.

But another program administered by the state, the Maryland Mortgage Program, accepts far more applicants. It offers home loans at below-market interest rates -- currently about 7 percent annually for a 30-year, fixed mortgage -- and your income need be only slightly below the median for the county in which you live.

The cut-off in Baltimore, for instance, is an annual income of $82,800 for a family of three. And the house can cost as much as $170,362.

"These programs are designed for the low- to moderate-income family," said Ed McDonough, a spokesman for the state's Department of Housing and Community Development.

"Some of them do allow for fairly high income levels, though -- solid middle class."

Many of the federal tax credits are the same -- designed for low-income earners, but sometimes available for middle-income families. The child-care credit is one example.

But most benefits are offered because people need them, not because people want them. And making yourself qualify for them might not offer a net gain in terms of quality of life.

"It's not about just income, it's a lifestyle thing. If you want to reduce your taxes, you need to change your lifestyle," said Lewis.

"You should look one year out at the consequences of the decisions you make, and mold your lifestyle in the way that works best. But not many people do. Who wants to live their life according to tax decisions?"

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