From when I was in junior high up to today’s Blondie comic strip, people claim that they don’t want to earn more income because they will be in a higher tax bracket. Because they don’t think through the details, they are throwing money away.
Here’s how.
At the beginning of 2013 suppose you earned $17,800 after all your adjustments (your adjusted gross income or AGI). Your Federal tax would be ten percent of that, $1,780. Remember, your gross income is larger than that. In the middle of the year you are offered a raise that would take your AGI to $19,580. But this puts you in the fifteen percent bracket. Gosh! Fifteen percent of $19,580 is $2,937. That’s $1,157 more in taxes for a raise of $1,780. Even though your math is wrong, you would still ahead being in a higher bracket.
Actually, if you turned down the raise on the basis of tax bracket change, you would have given up even more money. Remember, the tax is based on a marginal rate. The income over a certain level is taxed at a higher rate than income up to that level.
In 2013, you would be taxed ten percent on your AGI up to $17,850 and fifteen percent on the AGI over $17,850, not fifteen percent on all of your income or even AGI.
If your AGI was $19,580, you would be taxed $1,785 on the first $17,850 and fifteen percent on the next $1,730 which is $259.50. Your total tax is then $2,044.50. You would be throwing away $1,515.50 in order to avoid paying $264.50 more in taxes ($2,044.50 - $1,780).
