Turn down a raise b/c of tax bracket?

[jenn_1022]

My husband and I were discussing an upcoming raise he might receive. It would take his yearly income from $60,000 to $66,000. This is gross income. The new income would take us from the 15% tax bracket up to the 25%. After running some numbers, it seems that our net income would be less per month then what we are making now. Does that even make sense? Are we misunderstanding something? Should we turn down this raise to actually save money?

[Like2Plan]

My husband and I were discussing an upcoming raise he might receive. It would take his yearly income from $60,000 to $66,000. This is gross income. The new income would take us from the 15% tax bracket up to the 25%. After running some numbers, it seems that our net income would be less per month then what we are making now. Does that even make sense? Are we misunderstanding something? Should we turn down this raise to actually save money?

Wow--really? Even though you might have gone up into a new tax bracket, it is only the top layer that gets taxed the higher percentage--not your entire income. Here is a link that explains this in more detail

Because of this, even someone who might be in the 33% bracket might have a nominal tax rate of 20%.


Have you run the number through the IRS withholding web site? This might give you a better idea of your tax liability.

Link to IRS web site

[sweeps]

Like2Plan is correct. Only the income in the higher bracket gets taxed at that higher level. Turning down the raise would not make good economic sense.

[creditcardfree]

Tax brackets are based on taxable income, after itemized or standard deductions and exemptions. Taxable income is NOT equal to gross income. So at $66,000 you would most likely still be in the 15% bracket.

Of course, if you also have income this might change things.

You are only taxed 25% on the income that is above the 15% bracket.

Here is another link to check out.

And, no do not turn down a $6,000 raise!

[kork13]

no way. In most cases, you can probably up your retirement savings, thus reducing your taxable income to keep it below the tax bracket threshold.

Look at 401k's, or deductible IRA's. Both of these are contributed to with pre-tax money, which can be deducted from your taxable income. Take the raise!

[disneysteve]

I agree. Back when I was a medical resident making next to nothing, I had regular opportunities to moonlight, working as a real doctor in someone's office at night or on weekends making great money, like $40-$50/hour back in 1992. Some of my peers refused to moonlight because the added income would put them in a higher tax bracket. It made absolutely no sense but I couldn't convince them of that. My father, the accountant, always said it is better to make the money and pay the taxes than not to make the money at all.

[LivingAlmostLarge]

Agreed, it's better to make more and keep less than make none and have none.

[jIM_Ohio]

If you are married, remember to add in the std deduction and 2 exemptions to figure gross income for a given tax bracket.

For example if 67k income, 11k std deduction and $3600 exemtions, add 67+11+3.6=81.6 gross income equals 67k taxable income.

[Investing First Steps]

I see this fallacy all the time. Please correct your husband and spread the word. Our income taxes are graduated and incremental. Everyone pays the same amount of tax on the same amount of income. A guy who makes 1 million a year pays the same amount on his first X dollars that I do.

[GrimJack]

I remember getting into an argument with my dad (a banker!) in a similar vein - he refused to sell stock because he did not want to pay capital gains. I kept trying to tell him that no one goes broke paying capital gains. (It was only later that I realized he might have a little Freeman in him).

[MonkeyMama]

Actually, there are situations where making substantially more money (for substantially more work of course) will help you little after you consider taxes. Most average people would never have to worry about this.

But a mere $6k is not one of those cases. Everyone else is spot on.

[TBH]

I had a friend once whose net pay went down when he got a raise because it bumped him into the next bracket.

Still, even if that happened and your net income dropped very slightly at first, you'd be in a better position for the next raise. Refusing a raise seems like a bad idea to me.

[boosami]

Funny, I had a similar argument with someone the other day. He asked why I always owe each year and don't get a tax refund like him. I explained that it was due to making independent income that doesn't have withholding, so I have to pay the taxes quarterly. He said "Wouldn't it be better to get a refund instead of owing?" and didn't seem to understand that while I pay taxes on the extra money I earn, I keep to keep the majority of it, and that's more than nothing...

[kork13]

I had a friend once whose net pay went down when he got a raise because it bumped him into the next bracket.

I just don't understand how that can happen... I mean, unless you get slapped with the AMT (to my understanding, you lose most of your deductions under the AMT...?), it should be impossible for your net pay to go down.

**I'm using round numbers, I know they're not correct. work with me here.**

You make $42000 gross, with a a taxable income of $31000, thus in the 15% tax bracket. The first $8k is taxed at 10%, so you pay $800 for the first $8k. Now you pay 15% on the remaining $23k, or $3450. Total bill: $4250, or 10.12% of your annual pay. If that much is taken out of your paycheck automatically, it's $354.17. Monthly pay minus taxes: $3145.83.

You got a $6000 raise! WOOHOO! You now have a taxable income of $37000, in the 25% tax bracket. OH NO! ...but wait. $8k taxed at 10% = $800. Next $24k taxed at 15% = $3600. Last $5k taxed at 25% = $1250. Total bill: $5650, or $470.83/mo (11.77% of gross). Monthly pay minus taxes: $3529.17/mo. Net difference: $383.34/mo ($4600/yr) MORE than before the raise.

No matter how you swing the numbers, it should be impossible for your net pay to go down. Please correct me where I'm wrong here....

[Like2Plan]

I just don't understand how that can happen... I mean, unless you get slapped with the AMT....

kork13,
I don't think withholding formulas take AMT into consideration. In fact, I think the withholding formulas are rather one-dimensional. For example: If you are a two income family, the withholding may not take out enough (it doesn't know that your family income might actually be double and the top layers taxed at a higher rate). If you have more than the average number of deductions, it will take out too much. That is why it is a good idea to run through the IRS withholding calculator.

It is hard to say what happened. Withholding does not equal tax liability. There could have been other deductions in the paycheck, too. If a person's 401k contribution is keyed to a percentage of income and a pay raise is received, more will be taken out for the 401K contribution. Another factor might be life insurance. If the individual had life ins coverage through work, a raise would increase the amount of coverage and also the premium. Same for disability ins....