Turn down a raise b/c of tax bracket?

[Investing First Steps]

Is it possible that some State income taxes are not incremental? I seriously doubt it, but I suppose that's possible. I just wonder where this urban legend gets such legs.

[jIM_Ohio]

Is it possible that some State income taxes are not incremental? I seriously doubt it, but I suppose that's possible. I just wonder where this urban legend gets such legs.

YES- Ohio is like that.
For Ohio it's more of "filing status"- there is none.

So at federal level two people making 39-49k single are in a high bracket, but when married their bracket can probably be lowered.

Then at state level their bracket goes up considerably higher (from maybe 3 to 6 or 7 percent) because the state could care less whether married or not.

[Investing First Steps]

YES- Ohio is like that.
For Ohio it's more of "filing status"- there is none.

So at federal level two people making 39-49k single are in a high bracket, but when married their bracket can probably be lowered.

Then at state level their bracket goes up considerably higher (from maybe 3 to 6 or 7 percent) because the state could care less whether married or not.

I can see that. But, I still can't see a situation where making a dollar would have a negative value. Just a more rapidly diminishing one. Or am I still misunderstanding?

[disneysteve]

I still can't see a situation where making a dollar would have a negative value.

I don't think such a situation exists. If it does, I'd love to hear about it. That dollar would have to be taxed at a rate greater than 100%.

[Investing First Steps]

Well the argument is that if you make a dollar that puts you into these supposed "higher tax brackets" that apparently apply to all your income, not just the incremental dollar, then making that dollar would cost you money. I know no such animal exists on a Federal level, and I'm skeptical on a State level, but I'm not familiar with every State's policy so I don't want to speak out of turn.

Despite me being unaware of any such animal, I hear people all the time talking about they don't want to do X because it will "put them in a higher tax bracket." ... Which implies that somehow all their income, instead of just the incremental income is taxed at that rate.

[TBH]

Sorry I can't provide details on my friend's situation. I do know he was living in the state of Indiana at the time and not making very much money. I think he went from $25K to $26K or something like that, or perhaps he was making even less. It could have been in the teens. He was single, didn't own a house, and so had very few deductions.

Again, I don't know how this was possible, I just know that my friend told me that a raise put him in a higher bracket and his net pay went down.

I'm willing to believe this is not actually possible and there were other circumstances he didn't tell me, like his med insurance co-pays went up or something. This friend is not famous for being financially savvy. Wonderful person, but he's the first to tell you he's not good with money. He once left his car in the parking lot at his work for 8 months because it wouldn't start. When I pressed him about it, he said he was waiting til the car was all paid off and then he would get it fixed and sell it. Why he didn't do that earlier, and save himself 8 months of car payments on a car he wasn't using, I couldn't understand. But that was how he did it.

[disneysteve]

Despite me being unaware of any such animal, I hear people all the time talking about they don't want to do X because it will "put them in a higher tax bracket." ... Which implies that somehow all their income, instead of just the incremental income is taxed at that rate.

That's because most people don't understand how the tax system works. They think 25% bracket means 25% of your income is taxed, but it doesn't work that way.

There are times, of course, where your income could rise to a point where you phase out of qualifying for certain deductions, but it wouldn't affect your take-home pay, just the ultimate bottom line.

[sweeps]

It's possible someone could earn just enough to push themselves out of a credit or deduction that does not phase out gradually. So earning an extra $1 could "cost" them money. But that is rare -- it's not a situation that should discourage somebody from trying to earn more money.

[Like2Plan]

Despite me being unaware of any such animal, I hear people all the time talking about they don't want to do X because it will "put them in a higher tax bracket." ... Which implies that somehow all their income, instead of just the incremental income is taxed at that rate.

Generally, whatever "X" is a taxable event that will be adding more income onto the top layer. If the amount is large enough, it could end up going into the higher bracket and some of it being taxed at a higher tax rate.

Here's an example: Lets say your married filed jointly and taxable income of $60,000. The tax is 10% for the amount up to 16,050 (1,650) plus 15% of the amount above 16,050 (up to 65,100). Now, suppose you're thinking about cashing in a 50,000 deductable IRA (let's say you're eligible to cash it in with no penalties). In this example, 5,100 of the IRA $$ will be taxed at 15% and the remainder will be taxed at 25%. But what if you could take the money out in smaller increments of 5,000 each year (assuming the other taxable income part of the equation remains the same). The IRA money would be taxed at 15% vs 25% and a 10% tax savings.

[jIM_Ohio]

I don't think such a situation exists. If it does, I'd love to hear about it. That dollar would have to be taxed at a rate greater than 100%.

Three off the top of my head:

1) person is claiming a credit (such as EIC or child tax credit) and the raise loses the credit. We'll be in this situation if we gross another 6k.

2) SS taxation threshold

3) State tax trumps federal tax

[Exile]

Even if your concern were valid. jenn 1022, which it isn't, you could take the additional income and put it in a tax-free investment, such as muni bonds.

[disneysteve]

Three off the top of my head:

1) person is claiming a credit (such as EIC or child tax credit) and the raise loses the credit. We'll be in this situation if we gross another 6k.

2) SS taxation threshold

3) State tax trumps federal tax

#1 wouldn't affect your take-home pay each week, would it? Wouldn't that show up when you filed your taxes?

I'm not quite sure what you mean with #2. I know the SS tax maxes out at a certain income, but if you are over that threshold, you're take-home increases, not decreases.

#3 is the one I'm not sure about. Are there states where earning that extra dollar can actually raise the tax rate on your entire income?

[jIM_Ohio]

#1 - if a person planned for a $0 refund, then losing the credit would imply decreasing take home.

Anyone with kids making $109k and getting a raise to $111k will see this happen (child tax credit maxes at 110k). Wife and I are close to this now.

2- if income+half of SS exceeds 44k, SS is taxed. At 50 or 85 percent (percent depends on how MUCH over 44k you are). It's possible the first year a person collect SS and also collects a pension or IRA has this happen. I have seen "text book" cases, but nothing myself.

3) Move to Ohio and plan for a zero refund... then maybe your wife moves from part time to full time- and you then you owe at end of year.

The way Ohio taxes work- the more you make, the more they take- the percentage is graduated, but is also accelerated at high incomes. Meaning two people might be able to file seperately at a top bracket of 2 percent, but when you file jointly the whole thing is taxed at 6 or 7 percent. So in this case filing jointly might trump the federal tax.

HR block for example has a special program they to run 6 returns for anyone doing a joint ohio return (3 for fed- joint and 2 seperate returns, then a joint state and 2 seperate state returns) to calculate the best tax liability/refund situation.

My wife and I would actually get a HIGHER refund if we did seperate returns, but we would also lose the Roth IRAs if we did this. The moment the Roth's are out (by income) we will do MFS as filing status.

[Goldy1]

Last year if I was single, I would have probably paid next to no taxes. My income was taxed more b/c I was married. I didn't chose NOT to work b/c I would pay less taxes single.

[jIM_Ohio]

Last year if I was single, I would have probably paid next to no taxes. My income was taxed more b/c I was married. I didn't chose NOT to work b/c I would pay less taxes single.

If this is true, it means your spouse probably makes double or triple (or more!) than you do. Your spouse would have paid HIGH taxe$ single, but less taxes married.