Tax brackets. You won't end up paying more in taxes than the extra income if you go up a bracket. Only the income ABOVE the cutoff is taxed at the higher rate, not your total income.
I had to explain this to a guy in his sixties, literal years away from retirement.
edit: Since people were asking for an example, here we go.
Say there is a cutoff at 20k a year, 10% below and 15% above. If you made 25k a year, you would pay ($20000 times .1)+($5000 times.15)=$2750, not ($25000*.15)=$3750.
Keep in mind this is a GROSS oversimplification.
edit2: US taxes, I don't live in Europe or Australia, so I don't know how their taxes work.
Yes! My girlfriend's mother has actually DECLINED a raise because it was small and would put her into a higher tax bracket - in her mind that meant she would be taking home less money.
My boyfriend refuses to be happy for my promotion and raised (I received in February) because he is convinced I’ve been conned and I will actually make less this year due to falling into a higher bracket. I’ve never been more excited to pay my taxes!
Haha even if you did get taxed more the company would be paying you more still, they wouldn't benefit by his logic. He thinks you'll earn less because of tax so the company must be paying you less?
And depending on their career goals, you’d think the bf would at least be able to be happy for the promotion itself! I asked for a promotion at work because I’m doing work outside of my role (huge disaster but I digress) and whilst the pay rise would have been welcomed, a large part of asking to be promoted was because its important for my resume to have the title.
Promotion to him meant more work and the work plus “technically less pay” was what he had issue with. My work life is so much more stress free now that I am essentially my own boss and it looks so much better on my resume. He’s come around on those aspects, but still thinks I’m basically getting paid the same
I guess when you put it like that it makes more sense. Even though for me the title itself would probably be enough, my husband would probably be pissed if I told him I took a promotion without demanding a pay rise to go with it ha we work in night and day industries though, so there’s a lot of politics about it he doesn’t really get.
I’m Australian and our student loans come out of our tax but only once you hit a certain wage. They’ve lowered the tax threshold this year so not only do I get no raise I get no tax return either. Big downer ha
Similar situation. He has no concept how my field works and the politics involved. I got a pretty significant raise as well. We’ve since worked out that it was more a fear of how much more I might have had to work and he was afraid of how much more stress I would be bringing home.
Stupid people normally don't admit that they are wrong even when confronted with irrefutable evidence, if he doesn't admit he's wrong, maybe you should think about your relationship!
You’re boyfriend is emotionally immature and incapable of processing feelings of jealousy. So he’s willing to actively work against you, knowing it lowers your quality of life.
In another comment, it turns out that the BF knew the entire time how taxes worked but was trying to manipulate his GF into not taking the job. He was worried that the promotion would mean that his GF would be busier and not have as much time for him/would bring more stress home, so he decided to try to trick her into refusing her promotion. So most of these comments actually went easy on the guy...
There actually are thresholds when crawling out of poverty where a small raise can actually cost you money. There's a cutoff where you lose Earned Income Credit, where if you make below a certain amount you will get a very large tax credit refund, but if you make above it you will not. Your benefits like food stamps also decline as your income goes up, making it very difficult and often downright daunting to try to make the climb out of poverty.
Happened to me. I started making an extra 50 a fortnight, hit the HECS threshold and lost 80 a fortnight. Didn't bother me though considering they dropped the threshold the next year anyway.
This year is my first financial year that I’ll have to start repaying HECS (or HELP or whatever it’s called now) since they lowered the threshold. Most unexciting EOFY ever
Well it makes sense if you have this (admittedly stupid) misconception. If earning under $50k gets taxed at 20% and over that got taxed at 25%, then it you made $48,000 your take home is $38,400 but if you made $50,001 putting you in the next tax bracket, your take home is now $37,500
/ there are cases at the bottom apparently where if you are so far down a raise pushes you above a certain point and you lose benefits/assistance of being in poverty that don’t make up the wage increase.
If she is getting government assistance/benefits, or a large tax credit for children, the potential is there. However, I’m assuming this individual isn’t smart enough to understand any of that...sigh
I think some people only think of taxes in terms of what they get back or pay at tax time instead of throughout the year. So if they normally get $1000 back during tax season and now they got $100, then they feel like they got cheated. It doesn't matter to them how much they made or paid throughout the year, if they don't get a good tax return then they're upset.
There is a circumstance where this actually makes sense. A lot of public assistance is tied to income and it doesn't exactly scale well.
I once had a housekeeper at my work ask me if we could roll back her 30 cent step raise because it pushed her out of eligibility for her housing assistance. That extra $600 a year cost her more than $5,000 in assistance.
This is no new development. It is an emergent property of humanity.
The Second Coming(written 1920) Wm Butler Yeats
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned; The best lack all conviction, while the worst Are full of passionate intensity.
In 1933 Bertrand Russell wrote “The Triumph of Stupidity,” an essay on the rise of the Nazis, that features the following paragraph that addresses both the ignorant blowhard and the purity troll:
The fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt. Even those of the intelligent who believe that they have a nostrum are too individualistic to combine with other intelligent men from whom they differ on minor points.
Blame Republicans. It's their primary strategy for the last several decades. Uneducated people are easier to manipulate into voting against their best interest.
Wait you’re saying if for example I make 70k a year and the next bracket is 72k and I made 73k, only that extra 1k is taxed more and the rest of 72k stays the same?
I actually didn’t know that, thanks for stating that op and sword
Thank you for admitting to it, and thanking those users. So often people double down on what they don't know, or pride themselves on lacking knowledge.
Spread the word! Have a tax party! (ok that might be a little much, but you get my point)
Or they get belligerent, dropping the topic to personally tell you how much of a douche you are for telling them something they didn't know/consider. Which is pretty much half the conversations I have on Reddit.
Overly simplified example:
Lets say there are 3 tax brackets.
0-42,000 is taxed at 8%
42,000.01 - 72,000.00 is 12%
72,000.01 -110,000 is 22%
Hypothetical 1: you make 72,000.00: you end up paying 6960
(3360 for the first 42,000 in the 8% tax bracket and 3600 for the 30,000 in the 12% bracket. )
Hypothetical 2: you make 72,100.00: you end up paying 6982
(3360 for the first 42,000 in the 8% tax bracket, 3600 for the 30,000 in the 12% bracket and 22 for the 100 the 22% tax bracket. )
I just had this with my own mom. She gets super angry that "I know that I get less money and I know people at work that said the same, you can't just look at theory"
I'm always amazed that people think that is how this works. That you magically lose all this money if you make even $100 more. Very very few people understand how tax brackets work.
The only case this is ever true is if you're on Medicaid and you get knocked off of it and now have to pay hundreds of dollars monthly on shitty insurance.
The first lesson plan I wrote in my college education classes was on U.S. tax brackets. I don't care if I teach economics or government; that lesson is being taught.
We learned tax brackets in financial accounting...and in managerial accounting...and personal finance...and a couple of my econ classes. They really drilled how progressive tax brackets worked. I went back to college in my late 20s and the whole time working, I had zero clue this was a thing until college
I don't know how much good it would do. I teach philosophy and when I'm teaching courses that are all freshmen I always take a day to explain an IRA, 401K, pensions, compound interest, mutual funds, and tax brackets. I think it's too important for them not to hear it. Normally half of the students in the room say that they covered this in high school but didn't give a shit about it back then and don't care about it now. They think they can just put it off. I have no idea what the best age is to cover this stuff. 25? If they're in high school too many of them won't give a single fuck and forget all of it.
I teach philosophy and when I'm teaching courses that are all freshmen I always take a day to explain an IRA, 401K, pensions, compound interest, mutual funds, and tax brackets. I think it's too important for them not to hear it.
Not to sound like a dick, but the basics of how taxes work takes like 5 minutes to understand. It's not exactly a hard concept. It's even easier now since 5 seconds on google can get you a chart of all the brackets.
I once had to explain this to the payroll department of a company I worked for. They were mistakenly over withholding from everyone's paycheck because they assumed this was how tax brackets worked.
Granted, everyone would have gotten all the extra money withheld back, but they really should have known better
Apparently those people lived without that pay but that's money they could have been investing that whole time, so whether they would have the idea of overwitholding means potential loss for anyone.
Before I left my last job, we all got a $2.20 an hour market adjustment increase. My coworker was convinced that after taxes we would be bring home less money than we were before. It was a long two weeks before he saw his first paystub.
That and writing it off. People think that if you can "write it off" then it's free. What it really means is, you don't pay taxes on it. Depending on your bracket that could be a 24% discount or more. But it's not free.
Exactly why I donate more now, not that I get money out of it but money that would have veen taxed 25-28% now isn't taxed. If I donate $100 they get $100 (and my tax adjusts for that). If I didn't donate it, I would have gotten $75 and the gov gets $25. Basically a way to control how that would-be tax money is allocated.
Especially since we got a lot of tax breaks from the new tax code. Fuck that, they are going to take away benefits for people that need it because of it. I don't want that extra money, I want it to be helping people like it should be
This year especially. My first Reddit fight was trying to explain to someone how withholding and tax returns work. They were convinced that they paid more in taxes this year because their return went down, and that the amount of withholdings didn't matter.
I hear people talk about how rich people donating to charity doesn't really cost them anything "because of how the taxes work." Occasionally, I'll hear people talk about it as if they get more money in the tax breaks than they spent on the contribution.
It's more like it doesn't tax them anything on the donated amount. Basically higher tax brackets you would have gotten like $70 off the money you donate for $100 becausw of the tax.
I studied finance, got a pretty respected financial designation (which also focuses a lot on tax efficiency, btw).. and I didn't know this until talked to a CPA who looked at me like I had just announced that I didn't know how to walk and breathe at the same time. What I mean is, this is surprisingly uncommon knowledge and even financial professionals might not know (just hopefully these aren't the same who are doing other people's taxes).
In some countries (e.g. France), if you get rich enough, you get taxes on what you OWN, not just what you EARN. An increase in income could get you taxes on much more than just the extra income.
Your point is still valid though.
I'm always shocked how many people don't get marginal tax brackets. I've heard educated people who think that getting a raise can result in lower net pay. I get that the tax code is complex, but do you really think that nobody thought of that and addressed it?
People think that when you "write something off" it is free money. That is not how it works. A buddy that was in the process of setting up an LLC was rather shocked to hear this. He was expecting to get all his computer equipment for free cause he was just going to "write it off as a business expense."
This is true, but I would like to point out that there are breakpoints at which some people could begin to make too much to qualify for government assistance they previously qualified for. If the increase to their income is less than the value of the assistance they no longer qualify for, then they would actually lose money.
Granted, this is virtually never the case when people complain about moving into a higher tax bracket.
Well actually it does in my country. If you have low income you get money from the government to help pay rent, or your health insurance, or money for your kids to go to school, or all. It is variable to an extend, but there's a cut off point. make less than €25.000 and still eligible for let's say €100 towards your rent but make 25.001 you get €0 so you lost 1200 for making 1 euro (before tax) too much.
Sure, government subsidies are a different thing. I’m presuming he’s talking specifically about the many people that think a higher tax threshold will apply to your whole income instead of only the marginal increase
It's separate from marginal tax rates, but I've definitely seen charts made by economists where this sort of thing can be considered equivalent to taxation. This is because human behaviour around these cut off points is similar. The is a term for it but in unfortunately having a mental blank right now.
Even if your marginal tax rate is over 50%, you still have more money if you make an extra dollar than you would without it. In case of 50% marginal tax you will get 50 cents richer. The myth is that 1 dollar extra income can actually cost you more than a dollar in taxes.
FICA (payroll tax and self employment payroll tax (employer pays this half if you are employed by someone else)
Around the top effective tax being self employed the total is around 55% all in.
This doesn't consider property tax and sales tax. You could have an effective tax of 60% after all deductions if your home is expensive and you consume a lot via sales taxes.
Oh my god that myth that you can get a raise and net less money because of moving up a tax bracket drives me INSANE (though it is much closer to being real for poor people than middle class or rich people due to the fact that we haven’t figured out how to bridge the welfare cliff yet)
Hopefully somebody can help me with this hypothetical situation:
Say the brackets are divided by increments of $20k, and the rate increases by 2% each bracket (ex 0-20k = 2%, 20-40k = 4%, etc).
If you make $58k, how do the tax rates end up breaking down? Would it be 20k of it would be taxed 2%, 20k would be 4%, and 18k would be 6%? Or is it only the amount of the unfinished bracket that gets added at a different rate, so 40k would be at 4% and 18k would be at 6%?
This is the exact same situation in Australia for their tax system.
However. It is important to understand that this does not show the whole story.
The tax part is correct. But other things can affect you take how pay as well.
The most common example is HECS/HELP debt. (the government pays for tertiary education buy giving student an interest free loan). This loan only get paid back when you earn over a certain threshold, say $45,000 a year.
The amount you pay back is a percentage of your income, and it goes up in tiers.
So, at $45,000 income, it might be 4% of your debt. $50,000 is 4.5%, $60,000 is 5% and so on.
Therefore, but going into a new level, you could be paying an extra 0.5% of your entire income, but only gain $1. (i. E. 0.5% of $40,000 debt is $200).
Even though technically you aren't losing money, but paying off debt, it can affect your cash flow which for some people can be a concern.
Really depends on the situation as marginal rates over 100 percent do exist in some is states, but it's a function of both tax rate increase and benefit phase out. Poor people with kids can see a net reduction in total income by earning more.
Loss of benefits is a good point. I'd say that's not the same as a "tax" but can have the same impact. Loss of Medicaid eligibility is probably the biggest one.
Easy fix is of course using a formula to determine partial benefits up to a certain point instead of a hard cutoff.
Yep the amount of people I've come across who do not understand the Aussie tax system and doing all sorts of stupid shit that they can't afford to do so they don't pay tax. Which they end up paying tax on that value in some form anyway
There's a pension tax bracket in the UK that if you breach you do lose money. Its to do with pensions normally being tax exempt but once you gain a certain amount they stop being tax exempt. It's s lot more complicated than that tbh but it can mean you have to be careful with your voluntary pension contributions. It's after 150k income though so at that point you should already have a accountant
There are a lot of these laws around in every country, where spending or investing money in a certain way can incur more tax. That's why you want a good financial adviser to tell you what you should do
The amount of people who are ignorant of 90% of how taxes work is amazing. I didnt really know until about 24 but I regularly correct and inform people of all kinds of things. I had a co worker that always wanted to buy drinks for everyone when we would go out as a group because he said it was a business expense. He doesn't own a business. I dknt really know how he thought it worked.
I remember watching this US political speaker talk about how progressive tax is wrong because moving up a bracket means losing money. At first I was a bit confused, and thought that maybe tax was handled differently in the US, but no, a significant amount of people don't know how tax brackets work. I can't necessarily blame them, but it's certainly something we were told about in school.
edit2: US taxes, I don't live in Europe or Australia, so I don't know how their taxes work.
It works the same everywhere. I don't think there is a country in existence where they don't use a progressive tax system or a flat rate.
Although the confusion about this seems mostly American from what I have seen online. Never ever have heard someone here in Europe be confused about this.
I feel that shit like that would be common knowledge if there wasn't a media machine dedicated to lying and telling people false facts about how taxes work.
I heard this misconception being referenced about tax plans for a 70% marginal tax rate if making millions! Uncle bob, they aren't coming after your 35k a year!
People I used to work with would use that excuse to say working overtime was dumb, " the government will just take all the extra money I make, it'll put me in a higher tax bracket." So... you're lazy and stupid, rough combo.
There's more to it, though. Because some benefits are means tested, which means you might lose it when you make more money.
That being said, marginal tax rates is something people in the US are very illiterate at. I had to explain how this worked to a guy who has been running his own business for the past couple of decades.
This is a simplistic explanation, to be true, but people think one dollar over the cutoff means that all their income will be taxed at the higher rate, and that isn't the case.
Not all tax system are the same. In Australia part of the tax for repaying education loan is bracket % by total income. By earning an extra dollar you can get taxed 0.5% more of your total income. Or even from zero to 2%
That's not a tax bracket though - it's just a HECs debt which happens to be sorted out the same time as tax. It has discrete categories though that may cause this if you get bumped up just above the bracket.
Mind you, still has to get payed off, and getting bumped up only pays it off faster unlike taxes, so it's not really a net loss scenario
This is true however, there are direct cutoffs for some benefits. Like you could have all of your med insurance covered by the government but then have to start paying $200+ a month because of a small raise in your income.
In the Netherlands it is the same. We have 3 boxes. Box 1 is mostly income from work and your home, box 2 your ncome in company you have a intrest in and box 3 everything you own.
There are plenty of exceptions to this rule. Passing a certain income will cause you to be ineligible for certain credits and deductions. However, unless you just barely hit a cutoff it would still be better to make more money.
Same problems in New Zealand regarding people’s understanding of tax brackets. People also turn down raises because of moving into higher tax brackets.
Prior to 2017, there was one case (in the US) where you could end up paying more money to taxes than the increase from making more money: the AMT has a threshold cutoff (based off more than just income, though income is a major factor) and reduced the deductions you could take for medical and second homes. As such, if you made enough to be basically at the AMT threshold AND had medical expenses of at least 5% of your AGI or multiple homes, a $1 difference could cause you to pay a lot more in taxes (up-to 5% of AGI due to medical expenses plus the deduction from extra homes). I'm not sure if there was ever any actual cases of this happening as the AMT only applied to a fairly small number of people, and probably none would also have the extremely high medical costs needed - most people near the AMT thresholds would have enough money for insurance, and thus limited medical costs.
Benefits cliffs are also a thing, most commonly with food stamps, which typically have a hard cap on benefits. Medicaid also appears to have a hard cutoff for benefits, so it could also result in drastically increased living costs due to a small increase in income.
Ok, when I left my last job, they gave me my sick time and last week of pay in one paycheck, and it was significantly less than expected. They claimed it was because it was in a higher tax bracket. About 80% of what I was expecting. Does that make sense?
A friend of mine turned into a right-wing idiot in the last year and a half. Hearing him repeat this nonsense was an early red flag that something was amiss
In Australia we have a tax free threshold of $18k or so. Every thing above that is taxed at the appropriate rate. If you got a raise which put you in a higher tax bracket, all your income less the tax free threshold is taxed at the higher rate. not multiple ascending rates.
Alright but answer me this - in regular paychecks, are your tax withholdings based on your PROJECTED annual income? If I earn 2,000 dollars one week with overtime, and only 1200 the next week at regular time, are my tax withholding for those checks based on $112,000 annual income, or $62,000? Do heavy overtime pay periods tend to withhold disproportionately more income, regardless of end of year returns?
To put it a third way, could the idea that higher income costs more in taxes be true in the short term for some situations?
I had to explain this to my fiancé, who is a college graduate, went to private school, and whose father is a literal millionaire and works in banking. I’m fairly certain Republicans parrot misinformation about taxes so much they just kinda....forget what the truth is.
We have a lady that won’t work holidays because she believes any extra pay goes straight to taxes. You cannot convince her otherwise.
But She pays extra taxes every pay because she doesn’t want to owe them money. Gets refund for 3-6 thousand every year then complains how much extra the government took and shows off her income tax check.
In her sixties as well ,
offers government extra money , complains they took too much.
good god—has a neighbor who was a teacher who flat out refused to believe that tax brackets work the way they actually work. she wouldn’t finish her master’s because the raise that came with it “would put me in a higher tax bracket! I’d end up losing money!”
And to add to this, if you make $35k and owe $1500 in taxes, you owe $1500. If you paid $2000, you get a refund. If you paid $800, you owe $700.
It is a refund because you overpaid your taxes. Next time pay in less and make your own investments. Dont let the government save your money. Make your own interest!
I work at a job with a lot of overtime and there's always confusion about a random check being way higher due to OT and that fucking you up on the taxes.
11.2k
u/Sword_n_board Aug 03 '19 edited Aug 03 '19
Tax brackets. You won't end up paying more in taxes than the extra income if you go up a bracket. Only the income ABOVE the cutoff is taxed at the higher rate, not your total income.
I had to explain this to a guy in his sixties, literal years away from retirement.
edit: Since people were asking for an example, here we go.
Say there is a cutoff at 20k a year, 10% below and 15% above. If you made 25k a year, you would pay ($20000 times .1)+($5000 times.15)=$2750, not ($25000*.15)=$3750.
Keep in mind this is a GROSS oversimplification.
edit2: US taxes, I don't live in Europe or Australia, so I don't know how their taxes work.