One of the most common misconceptions about the U.S. tax code is that a raise that brings you into a higher tax bracket could result in taking home less money because you’re paying a higher tax rate.
That’s 100% not true.
But I’ve heard this myth a lot.
And it goes like this.
First, let’s take a look at the 2024 tax brackets in the U.S.:
Let’s say you’re single and earn $46,000 a year. According to the tax code above, you’re paying a 12% income tax rate because your income is between $11,600 and $47,150.
Now let’s make things a little more interesting.
You just got offered a promotion that would bring your salary up to $50,000. Woohoo, right?
The “problem” is this promotion would push you into the next higher tax bracket, which is 22%.
So, here’s where the misconception comes in.
People think:
$46,000 x .12 = $5,520 in taxes.
Take home = 46,000 – 5,520 = $40,480.
vs.
$50,000 x .22 = $11,000 in taxes
Take home = 50000 – $11,000 = $39,000.
Boo! That raise would reduce your take home income by $1,480!
Wrong.
That’s not the way marginal tax rates work because you’re only taxed at the higher rate for income above that rate’s minimum.
Your income is divided into portions that are taxed at different rates.
That means 100% of your salary is NOT taxed at the new higher rate.
So in your case, you’re only taxed 22% on $2,850, which is the amount you earn over the 22% tax bracket’s minimum threshold.
The remaining portions of your salary are taxed at the 12% and 10% tax rates.
Don’t worry. Getting a raise won’t decrease your income.
