It’s a myth that a raise can cost you money in US Federal Income Taxes

by arghvark

I’ve heard stories about people who got a raise only to find out that they were bringing home less money because of “taxes” on the additional income, and I’ve always been suspicious. It just didn’t sound right. So I’ve done calculations to satisfy myself that, in fact, it can’t happen as regards US federal income tax.

My calculations and conclusions do not take any of the following into account:

  • state and local taxes
  • payroll taxes of other kinds
  • changes in other payroll deductions
  • company policies

I suppose one could lose income on a raise if some tax took a single percentage of all income, with the percentage set in income brackets; then if the raise put one over a threshold to a higher rate, the tax could increase such that the new total tax would be higher than the difference between the old salary and the new one. It would likely involve a small raise, the crossing of a threshold, and a big percentage increase due to crossing the threshold. But US Federal Taxes don’t work like that.

Marginal tax rate system

The US Federal Income tax is a marginal one; I will explain that in a short way here, There are other explanations that are more extensive and possibly better elsewhere.

The government sets ‘tax brackets’, the ones I have for the last tax year (2017) are:

     Income
        from      to   tax
         0 -   9500   10%
    9500 -  38750  12%
  38750 -  82500  22%
157500 - 200000  24%
200000 - 500000  32%
500000 -              37%

The “marginal” part means we pay 10% of our income up to $9500; for income between 9500 and 38750 we pay 12%, and so forth.

So for an (adjusted) income of $50k, raw tax liability would be

$  950  (10% of the first 9500)
$ 3510  (12% of the 29250 between 9500 and 38750)
$ 2700  (22% of the 11250 between 38750 and 50000)
------
$ 7160  total

So this is an effective tax rate of 7160/50000 = 14%.

So if someone gets a raise to, say, $55,000, they will get $5,000 per year additional income and pay 22% ($1100) on that additional $5,000. Since the tax burden on the existing income does not change, and one always pays (far) less than 100% of the additional money, it is not possible to lose overall income due to Federal Income Tax on the raise.

I’m also not talking about withholding amounts, which are only vaguely related to the amount of tax that you will pay. I don’t know what calculations are made to determine withholding, it might be interesting to see the effect a raise could have on those.

I read a post fairly recently that said a person’s employer stated that giving them a raise would cost them money. I would be interested in the details of any cases where this is true, but I’m convinced it cannot be from Federal Taxes.

Do people know of other kinds of deductions or payments that can cause one to lose income because of a raise?

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