Debunking Tax Myths about Earning More Money
Earning more money should always be a good thing! Too often, people will lament about getting raises, bonuses, or overtime pay because the higher income would put them into the next tax bracket. While earning more money may put you in the next tax bracket, it’s important to know that it doesn’t mean all of your income will be taxed at a higher rate.
The IRS uses a “marginal tax rate”. This means that you’re taxed on your income in stages, rather than your income as a whole. Here are the tax brackets for single and married couples (filing jointly) for 2019:
|Tax Bracket||Single||Married Filing Jointly or Qualifying Widow|
|10%||$0 to $9,700||$0 to $19,400|
|12%||$9,701 to $39,475||$19,401 to $78,950|
|22%||$39,476 to $84,200||$78,951 to $168,400|
|24%||$84,201 to $160,725||$168,401 to $321,450|
|32%||$160,726 to $204,100||$321,451 to $408,200|
|35%||$204,101 to $510,300||$408,201 to $612,350|
|37%||$510,301 or more||$612,351 or more|
For example, Tom and Cindy each got raises of $2,000 annually that put their taxable income over $78,000 for the first time. They are upset because they feel that now that they are in a different tax bracket, they will actually walk away with less money than if they hadn’t taken the raises. This isn’t true. If Tom and Cindy had $80,000 of taxable income in 2019, their taxes would be calculated like this:
- 10% of the first $19,400 earned
- 12% on the 19,401st through 78,950th dollar
- 22% on the 78,951st dollar to their 80,000th dollar
As you can see, they will not be paying 22% on their entire $80,000 earned! They can now be more excited about their raises than they were before!
Bonuses are different, but they’re really not. The IRS has special rules on how taxes are withheld on bonuses. Most companies will take the easy route and withhold 22% for federal income-purposes. The difference is that, while 22% if withheld, that’s not actually what’s paid in taxes. The actual tax you owe is calculated when you file your tax return. If over the year, more money was withheld than what you actually owe, you will get the difference back in a refund.
Rarely does it make economic sense to reject a raise, bonus, or overtime. However, some tax benefits can be phased out once income is high enough, including IRA deductions and premium tax credits. If you’re concerned about the tax consequences of making more money, get a strategy started right now! Please reach out if you have any questions and enjoy those hard earned dollars!
All the best,