Have you ever heard someone say they don't want a raise because it would "push them into a higher tax bracket"? This common myth comes from misunderstanding how tax brackets actually work. Let's clear things up.
Think of your income like filling up different buckets. Each bucket has its own tax rate, and you only pay that rate on the money in that specific bucket.
When people say they're "in the 22% tax bracket," they're actually only paying 22% on a portion of their income - not the whole thing. The rest of their money was taxed at lower rates.
Say you're single and made $60,000 in 2023. Here's how your income would be taxed:
The first $11,000 is taxed at 10% The next chunk ($11,001 to $44,725) is taxed at 12% The final chunk ($44,726 to $60,000) is taxed at 22%
So even though you're "in the 22% bracket," most of your money is taxed at lower rates. This is why we have two important terms:
Remember that raise someone was worried about? Let's say they made $44,700 and got offered a $1,000 raise. They worried their whole income would suddenly be taxed at 22% instead of 12%.
The truth? Only that $1,000 raise would be taxed at 22%. Everything below $44,725 would still be taxed at the lower rates. You always take home more money when you get a raise, even if it pushes you into a higher bracket.
Our tax system is designed to be progressive, meaning those who earn more pay a higher percentage. But by using brackets, we make sure everyone pays the same rates on similar amounts of income. Whether you make $50,000 or $500,000, your first $11,000 is still taxed at 10%.
Understanding tax brackets helps you make better financial decisions. Don't turn down opportunities to earn more money because you're worried about tax brackets. Remember: