Is it possible for a pay raise to result in less income due to being put in a higher tax bracket?

Question

If not, why not? Is it because our tax system works on a "graduated" income tax?

Answer 1

It is and isn't....

No you wont see income taxes causing you to make less income... the way the tax system in the US works is as follows...

If taxable income is between $0 and $7,550 then you pay 10% on the money you make over $7,550 until you reach $30,650. Then you pay 15% taxes on the amount beyond $30,650 but still only 10% on the amount between 7550 and 30650... That's the way it works for each change in tax brackets. A raise that puts you into a higher tax bracket will only cause the higher bracket to impact the amount beyond your lower tax bracket.... so in this regard it will not cause you to lose income.

NOW... here is where it can impact you. Some deductions and tax credits only apply to incomes below a certain level. If the raise was to cause you to lose a deduction or tax credit then it could cause your after tax income to be lower, but because of the vast number of different credits/deductions/rules its only possible to figure out if a raise would harm you if you have someone look at your situation in detail.

Answer 2

that would be the job loss if the Bush tax cut was not extended. That means an increase in taxes on the middle class. The middle class is the true job creators, because their spending is what drives the consumer economy. that is why the Obama plan only raises taxes on the 2%, those people do not create jobs by consumer spending. the Obama plan does not raise taxes on 97% of small businesses. businesses figure taxes on net income after all business expense is deducted, therefore a proprietorship with an ADI of $250,000 is a 5 million dollar business, not your mom and pop store. much attention has been placed on the federal income tax brackets, but the real tax increase will be on people like Romney who instead of earning wages, profit from investments. there will be a 5% increase for the return to the Clinton capital gains tax and a 3% increase for the Obamacare charge. So Romney will be seeing a 22% tax next year instead of 14%, and that does affect off shore deposits. a tax shelter is moving earned income into capital gains, but because the capital gains tax is increasing more than the earned income rate, you won't see much movement to off shore shelters. so your premise is wrong. Obama has figured in your thoughts and came up with the right answer. arithmetic wins over fairy dust again.

Answer 3

No it isn't. The tax on the amount you made before doesn't change even if the increase puts you in a higher bracket - only the amount that is over the bracket limit, which would be part of the increase, would be taxed at the higher rate.

The people who said otherwise, and that it had happened to them, had to have something else change also - like the person who was no longer getting overtime pay so her total pay went down - that wasn't because of the tax bracket.

Answer 4

Generally, no. Only the additional income is taxed at the higher rate. For example, if income up to $15,000 was taxed at 10% and income above $15,000 at 20%, then a raise from $10,000 to $20,000 would increase your tax from $1,000 to $2,500 (10% of 15,000 plus 20% of $5,000), NOT to $4,000 (20% of $20,000).

In extremely rare cases, yes, but only by a few dollars, and only if it is a very small raise. This happens if you go from being a few dollars below the limit for eligibility for a particular credit to a few dollars above it, and does not necessarily involve with tax brackets.

Answer 5

Actually, it can if other things change too.

Best example is when I went from hourly paid clerk ($7 an hour) to Salaried Management ($320 a week) At first glance I I received a dollar an hour raise. Shot me into a higher tax bracket so a greater percentage was taken out in taxes, but the real kicker is I went from 40-50 hours paid a week, to 70-100 hours for just the salary. Figure that one. My "raise" put my hourly pay (gross before taxes) at around $3.20 an hour.

Can't win for losing I guess.

Answer 6

Yes, I went through it.

I got a raise, then found my check was less, so I went to the boss and asked the raise be taken back or increased because of that. He said the company couldn't do that and I'd have to live with it.

Our tax system is way too complicated and intrusive.

Where I now live in China, personal income taxes do not come into play till a person makes considerably more then the average person.

Plus they don't have a sales tax.

Plus where I live, I can buy a home and have zero property taxes.

Hell, except for living in poverty wages according to the USA, I'm almost virtually tax free except for a pittance paid to the USA.

The USA tax system is repressive in more ways then just paying it. It is far too intrusive in our lives. The government has no right to know where we live, what our job is, where we work and what our spending habits are, unless we want to tell them.

Peace

Jim

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Answer 7

The tax bracket isn't an absolute percentage of your income. This prevents someone's one-dollar raise from costing him.

Graduated tax works like this:

Suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2003 and your status was Married filing separately; then your tax would be calculated like this:


( $ 7,000 - 0 ) x .10 : $ 700
( 28,400 - 7,000 ) x .15 : 3,210
( 57,325 - 28,400 ) x .25 : 7,231
( 87,350 - 57,325 ) x .28 : 8,407
( 100,000 - 87,350 ) x .33 : 4,175
Total: $ 23,723

This puts you in the 33% tax bracket; but as a percentage of your income, your tax is about 23.7%.

Answer 8

It's possible. However, it can be avoided. You have IRA's and investments, retirement funds that will avoid taxes until you take them out. When you retire you will be in a much lower tax bracket, if any, depends on the income and how much you take out. Charities are a wonderful way to claim tax deductions also. It is much nicer and feels good to contribute to these organization. Cancer is a great one, but there are many good causes.

Answer 9

Absolutely. The best way to offset this affect and actually increase your Net is to contribute to your 401K. That is, of course, if you are offered one at work. Or whatever Qualified Retirement Plan is offered to you on a "pre-tax" contribution basis. These contributions will affectively lower your 'taxable' income and thus, in some cases, put you in a lower tax bracket. This will cause your Net to increase, PLUS you're shoring up your retirement at the same time.

Answer 10

In general, the answer would be 'NO', because the increasing tax rate applies to the income above certain levels, not on the entire amount.

That said, the Alternative Minimum Tax is nailing many more people. I don't know how that might affect you.