Tax Brackets

Tax brackets are remarkably widely misunderstood. I've had numerous conversational partners state that, “I don't want a raise, 'cause that'll put me in the next tax bracket and I'll actually lose money!”

This is profoundly incorrect. Increasing your taxable W-2 income will always increase your post-tax earnings, regardless of your current or future bracket.

As you make more money, of course, your taxes will increase. However, those tax rates are marginal, which means that they only apply to the portion of your income that falls within their bracket.

This table illustrates the tax brackets for a single person filing in 2017:

BracketRate
$0–$9,32510%
$9,326–$37,95015%
$37,951–$91,90025%
$91,901–$191,65028%
$191,651–$416,70033%
$416,701–$418,40035%
$418,401+39.6%

Let's work an example by initially supposing that your W-2 income this year will be $90,000 (after any deductions). That puts you in the 25% bracket, so your rates would be:

  • 10% on the first $9,325,
  • 15% on the next $28,625, and
  • 25% on the remaining $52,050.

If we do some arithmetic:

Your tax-home pay, then, comes to $71,761.25, with a total effective tax rate of just under 20.3%.

Now let's suppose that instead you'd earned $100,000, putting you in the 28% tax bracket. Your rates would now be:

  • 10% on the first $9,325,
  • 15% on the next $28,625,
  • 25% on the next $53,950, and
  • 28% on the remaining $8,100.

Mathin' it up:

That leaves you with a take-home of $79,018.25 at an effective rate of about 21.0%.

Notice that the marginal $8,100 was taxed at your bracket's 28% rate, but that the rest of your income was taxed at lower rates.

Go ahead and accept that raise! It'll always mean a larger post-tax payment.

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