An Experiment in Spending Less – Maternity Leave
I’ve always known that my biggest spending weakness happens during the day when I’m at work. But I never was able to test it for more than a couple of days in a row. The lure of lunches out and afternoon snacks was too strong.
After being on maternity leave these past three months, I’ve been able to see what it would be like if I nearly eliminated spending during the day. My husband and I share one car which he uses to go to work everyday. Therefore if I want to go anywhere during the day I have to walk and I have to take my son with me. Since we live in a fairly residential area, it’s a real hike to any exciting shopping options.
So waht have been the results of this unintended experiment? A big change in my spending habits. Typically, I spend into my ING Direct overdraft before my paycheck arrives. On maternity leave this doesn’t happen. It’s even more impressive when you factor in that my income has decreased 20% during my leave.
When I go back to work in June, you can bet I’ll be bringing my lunch to work and watching the snacks. I know I can do it now and have witnessed the huge impact it can have on my finances.
Trent at The Simple Dollar wrote a far more comprehensive post on Trimming the Fat from Your Work-Related Spending.
Tracking my spending
Mrs. Micah at Finance for a Freelance Life is challenging her readers to manually track their spending in February. This is something I’ve been meaning to start up again. A couple of years ago, I read “Your Money or Your Life” by Joe Dominguez and Vicki Robin and it really changed how I look at my finances. I tracked my finances manually for several months and learned a ton about where my money goes. I know for a fact that my biggest weakness in eating out. I’ve cut way back on dinners out but still have a terrible time bringing my lunch from home. With all the changes we have coming up, I feel like this would be a useful exercise to help prioritize our spending for the baby and a possible mortgage.
Currently, I’m using Mint to keep track of my expenses. I like how easy it is to check in on my finances. My favorite feature is the trends analysis. Mint creates a pie chart of your monthly expenses broken down into major categories and then you can drill down into each category to see all your expenditures. There are several drawbacks to Mint though. It doesn’t keep track of how much I save each month in relation to the other categories. In addition, because we have many accounts that we transfer funds between, it really screws up the tracking in Mint.
I truly believe that tracking and analyzing spending by hand is the most powerful way to understand where your money is going. Once you have that understanding, then you can start making significant changes.
So here goes.
Feb. 1, Sunday – total $140.80
Breakfast and to-go bagels from Einstein Bros $17.70
Last purchases at Babies’r'us before baby arrives $123.10
Feb. 2, Monday – total $27.12
Drinks and snacks at CVS $4.86
Lunch at Potbelly $6.69
Dinner at Boston Market $15.57
Join in at Where’s my money going?
US Income Taxes for Expats – Foreign Housing Exclusion or Deduction
Continuing my mini-series on filing your US income taxes while living and working overseas, this post will focus on how and when to use either the foreign housing exclusion or deduction.
Check out my other posts on this topic:
- Basics of US Income Taxes for Americans Living Overseas
- How to Use the US Foreign Earned Income Exclusion (FEIE)
Foreign housing exclusion vs. foreign housing deduction
There’s a very easy way to know whether you should use the exclusion or the deduction.
If you work for an employer and you pay for housing out of your salary or your employer gives you a housing allowance, then you can only use the foreign housing exclusion.
If you’re self-employed, then you use the foreign housing deduction.
If you do a little bit of both – traditional employer salary and self-employed income, then you can use both the exclusion and the deduction, but you calculate the housing exclusion first more below).
Calculating the foreign housing exclusion
First, you calculate the base housing amount which is equal to 16% of the foreign earned income exclusion, so in 2008, 16% of $87,600 is $14,016. If you are living in a foreign country for entire calendar year, you use $14,016 as your base housing amount. If you’re only there for part of the year, you multiply the $38.30/day rate by the number of full (24 hour) days you lived in the foreign country.
Next, you calculate your housing limit which is typically 30% of the foreign earned income exclusion. For 2008, the full year amount would be $26,280 or $71.80 per day if you’re only living abroad for part of a year. If you live in a high-cost locale, however, the limits can be much higher. For example the London housing limit is $82,900! A list of the 2008 housing limits can be found in the IRS form 2555 instructions.
Once you have the base housing amount and housing limit amount, you can figure your exclusion. Say your housing expenses were $2000/month or $24,000 for the year. The $24,000 is under the housing limit for a standard city, so you can use your full housing costs for the calculation. Subtract your housing costs ($24,000) from the base amount for 2008 full year ($14,016) and you have $9,984 of excludable housing expenses.
A huge drawback is that the foreign housing exclusion can only be used for rented housing. You cannot exclude the cost of paying off your mortgage or any interest payments that are deductible.
Interaction with the Foreign Earned Income Exclusion
Here is where this gets a little complicated. Once you’ve figured out your excludable housing amount, $9,984 in the above example, you subtract it from your foreign earned income. Continuing our example, if you earned $95,000 in foreign earned income - $9,984 would your foreign housing exclusion and $85,016 would be your foreign earned income exclusion.
The maximum amounts of income and housing that you could exclude at the 2008 rate would be ($87,600+($26,280-$14,016) ) $99,864 at a standard rate locale. For a high-cost city the excludable amounts could be much higher. For example, in London, you could exclude up to $156,484 ($87,600 + ($82,900-$14,016) for 2008. Bear in mind though, you would actually have to be spending the $82,900 on rent – that’s $6908 per month!
If your income is more than the maximum for your city, then you will owe US taxes on the amount over your exclusions.
Calculating the Foreign Housing Deduction
Remember, you can only use the foreign housing deduction if you have self-employment income. You use the same limits as described above for the foreign income exclusion. Your deduction amount cannot be more than your excluded foreign income.
If you are self-employed and have a regular job, you would calculate the exclusion amount first then deduct the remainder of your allowable expenses. All of this would be subject to the same limits as above. One last thing to note is that your housing deduction cannot be more than the housing exclusion.
Forms
To claim the foreign income and housing exclusions, you will need to file Form 2555 (instructions can be found here). File this form with your other tax forms.
Resources
IRS Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad
The Cost of Daycare
With a new baby on the way, daycare costs are looming in my future. Currently I’m planning to take six months off and am very fortunate that a little over half will be paid maternity leave. We’ve set aside some savings to offset the cost for the last few months. But eventually, I believe I will wish to go back to work full-time. Although, many people will caution you that you may change your mind once the baby arrives. Even still, I’m pretty sure that I will want to be employed.
Today I realized what a huge expense that is going to be for our budget. Here is DC it’s around $1200/month and in London it appears to be around £600/month for an infant but in many places up to £800/month. This is assuming we go the daycare route as opposed to the nanny and in-home childminder options.
What all that means is that in order for me to go back to work, I must make more than £10,500 pre-tax just to pay for daycare. I’m hoping to make around £25,000/year pre-tax in the UK when I start working. Note: I’ll be covering UK and US taxes in a later post including a comparison of the two.
Once taxes are subtracted, I’m left with £21,207 net of tax. Then up to £9600 of that amount per year will go straight to childcare! Leaving me with £11,607 after taxes and childcare expenses. So in theory I’ll be working full-time less than £1,000/month after-tax. Yikes! That really makes me wonder if there’s not some better way to do this.
There are other options. Staggering our schedules could potentially make a difference. My cousin and her husband have taken this to the extreme in that she work days and he works nights. The children, therefore, are never in daycare, but I’m not sure how much my cousin sees her husband.
Another possibility is having each spouse work different days of the week or taking the early or late shifts during the day. However, part-time daycare can be problematic as well. For example, in DC unless you can find another family that requires the opposite of your schedule (you need M-T-W, the other couple needs Th-F), the daycare will often charge for the full week anyway!
We’ve been really spoiled these last few years. With decent salaries and relatively low expenses, our savings rate has been high and we’ve been able to accomplish financial goals fairly easily. I can see that the pace of that progress – saving for a home, retirement and travel – will definitely need to be re-evaluated over the next few years.
For those who’ve already navigated these challenges, any suggestions?