Pages

Tuesday, March 8, 2016

Can getting a raise be bad if it pushes you into a higher tax bracket?

Everyone has a co-worker, uncle, or friend who will warn you about getting a raise because it will push you into a higher tax bracket. 

They are implying that earning enough to "be in a higher tax bracket" results in less take home income than if you didn't get the raise at all. I have to admit, having all of your income taxed at 25% instead of 15% would be a huge hit! However, this involves a fundamental misunderstanding of how the US income tax brackets work. In actuality,
Only dollars earned above the tax bracket line are taxed at the higher rate.
Here's a glimpse at the taxable income brackets for a single filer in tax year 2015:


If you were on track to make $37,400 taxable income in 2015, but then get a $100 dollar raise, this would push you from the 15% marginal income tax bracket to the 25% marginal income tax bracket. But out of the $37,500 you now make, only $50 (the dollars in the 25% bracket) are taxed at 25%! All the other dollars you made are still taxed at 15%, or even 10%. (or in fact, 0%, since some of your income is covered by deductions or exemptions and not taxable at all!)

If your co-worker or uncle told you in October "Are you sure you want to work this November and December? It might push you into a higher tax bracket!" you would probably laugh at him. Now you can do the same when he warns you about your raise. Earning an extra dollar will never cost you more than a dollar in taxes just because it's in a higher tax bracket.

Note: Although earning extra income will never cost you more in taxes than you earn due to tax brackets, there are some cases where earning a single additional dollar may push you above an income limit for a certain tax credit or deduction that you were previously eligible for, increasing your tax liability by more than a dollar. That is out of scope of this article.

No comments:

Post a Comment