Some people worry that if their income increases enough to push them into a higher tax bracket, their overﷺall take-home pay, or net income, will decrease. They might think that getting a raise, especially one that nudges them into that next bracket, will actually hurt them.

Fortunately, that isn’t how the U.S. tax system works. Let’s break down this misc🌠onception so that you have one less thing to worry a🐻bout and can accept your next raise gladly.

How Tax Brackets Work

The U.S. has a progressive tax system, using 澳洲幸运5开奖号码历史查询:marginal tax rates. What does this mean?

• 澳洲幸运5开奖号码历史查询:Progressive means that as you make more, you pay a higher tax rate on some income. The idea is that those who can afford it should pay more in taxes. There are a lot of flaws and loopholes in this premise, as well as broader 澳洲幸运5开奖号码历史查询:problems💖 with the American tax system, but that’s the idea.
• Marginal refers to the part of your income on which you pay the higher rate. It means that the higher rate doesn’t apply to all of your income, just income above a certain threshold (the high end of the previous tax bracket). The Internal Revenue Service (IRS) sets these thresholds and adjusts them annually to account for inflation.

Example

For tax year 2024, an unmarried manager who earns $150,000 and an unmarried retail clerk who earns $30,000 will both owe 10% on their first $11,600 of taxable income. However, the manager will pay a rate as high as 24% on some of their income, while the clerk won’t pay more than 12% on any of their income.

The concept of a marginal tax bracket may be easier to understand with tables that break down the tax brackets by income ranges and a✃ssociated tax rates.

Here are the tax rates that 澳洲幸运5开奖号码历史查询:single (unmarried) people will pay on the income that they earn in 2024 and 2025.

Note: These rates are different if you file your taxes as a 澳洲幸运5开奖号码历史查询:married couple, 澳洲幸运5开奖号码历史查询:married but file separately, or if you qualify as a 澳洲幸运5开奖号码历史查询:widow/widower or 澳洲幸运5开奖号码历史查询:head of household (see the complete federal tax bracket tabl🅘es below).

Here’🌼s an example of how✨ to apply the information in this table:

Let’s say you have a taxable income of $60,000 in 2024, and you file as an unmarried taxpa🍌yer.

• The first $11,600 is subject to a 10% tax
• The next $35,550 is subject to a 12% tax
• The remaining $12,850 is subject to a 22% tax

Notice that we said “a taxabl꧋e income of $60,000,” not “a salary of $60,000” or “total wages of $60,000.”

Your actual earnings might be $74,600. But after subtracting the standard deduction of $14,600 for tax year 2024 ($15,000 for tax year 2025), your taxable income is $60,000. You don’t owe any federal income tax on the first $14,600 of your income.

Federal Tax Brackets

Here are the complete federal tax brackets and rates that apply for tax year 2024.

And here are the complete federal tax brackets and rates that apply for tax year 2025.

A More Advanced Example

Now that you understand the basics of marginal tax rates, let’s build on the last example to see exactly what happens to your tax♍es when youꦡ move into a higher tax bracket.

In 2024, suppose your 澳洲幸运5开奖号码历史查询:taxable income is $40,000 a year and you get a $10,000 raise, making your taxable income $50,000. Before the raise, your highest🎃 tax bracket was 12% because your income didn’t exceed $47,150. Now your h༺ighest tax bracket is 22%. But only $2,850 of your income ($50,000 - $47,150) will be taxed at that rate. The rest will be taxed at 12% or less. Here’s how it breaks down:

• You will be taxed at a rate of 10% on the first $11,600 of taxable income—or $1,160.
• Then, you will be taxed at 12% on the next $35,550 of income—or $4,266.
• Finally, you will be taxed at 22% on the remaining $2,850 of your income—or $627.

So, your total tax will be $6,053. That works out to an overall, or 澳洲幸运5开奖号码历史查询:effective, tax rate of 12.1%.

Now, suppose you ha𝔍dn’t gotten the $10,000 raise.

Using the same math as above, your tax bill on $40,000 in income would have been $4,568 (10% × $11,600) + (12% × $28,400).

Bottom line: Your $10,000 raise has added $1,485 to your taxes, but you’re still ahead by $8,515 ($10,000 - 🌠$1,48෴5).

An Exc𝔍eption to the Rule: Income-Restricted B💞enefits

Earning more income can, in fact, leave you with less money if it eliminates or reduces your eligibility for certain social services, tax credits, or tax deduction𓆉s. Here are some examples of those items:

• 澳洲幸运5开奖号码历史查询:Premium tax credits for Health Insurance Marketplace plans
• Medicaid
• 澳洲幸运5开奖号码历史查询:Student loan interest deduction
• 澳洲幸运5开奖号码历史查询:Lifetime Learning Credit
• 澳洲幸运5开奖号码历史查询:Mortgage insurance premium deduction
• 澳洲幸运5开奖号码历史查询:Saver’s credit
  

Another๊ Consideration: How Much Will You Give Up to Earn Less?

As your marginal tax rate increases, you get to keep less of each extra dollar that you earn. If you have to work harder or longer hours to get those extra dollars, ther💯e’s going to be a point when it’s no longer worth it to y🌺ou.

For example, if you’re financially comfortable, you might n꧋ot want to work weekends if you’re only keeping $76 of every additional $100 that you earn—and that’s ൩only accounting for federal income taxes.

Social Security takes another 6.2% cut until you reach the annual 澳洲幸运5开奖号码历史查询:Social Security earnings limit ($168,600 in 2024), and Medicare takes another 1.45% no matter what your income is.

If you’re self-employed, you pay the employer's share of Social Security and Medicare in addition to the employee share. This is known as the 澳洲幸运5开奖号码历史查询:self-employment tax.

High earners also pay an additional 0.9% Medicare tax on income that exceeds a certain amount.

Finally, if you earn income somewhere with high state and local i꧋nc🌳ome taxes—such as Connecticut, Hawaii, or New York—then you’re keeping even less.

Now you know why wealthy people try to minimize their earned income (it’s highly taxed) and maximize their investment income (it’s often less taxed)—and why tax analysts say marginal tax rates are a disincentive to work.

The Bottom Line

The next time you receive a raise, don’t let concerns abou🦩t tax brackets dampen your enthusiasm too much. You really will take home more♓ money in each paycheck.

When an increasܫe in income moves you into a higher tax bracket, you only pay the higher tax rate on the part of your income that falls into that bracket. You don’t pay a higher rate on all of your income.

That said, it’s a good idea to see how the extra income from your raise might affect your big picture. You may wish to do additional planning to reduce your taxes or to retain your eligibility for certain benefits🍸.

For example, y🙈ou might want to either avoid selling investments that have increased in value, especially if yo🌜u haven’t held them for more than a year, or contribute more to your qualified retirement savings plan.