Ignorance of Tax Brackets

[myrdale]

Yesterday I was speaking with a friend, who I'd consider to be reasonably educated on finance (at least better than average). He was telling me about a mutual friend who just got a promotion and a raise. Then he said something that really surprised me. He said he told her "Make sure they don't raise you're pay too much or you'll be pushed into a higher tax bracket". My response was "What!?!"

Years ago, I had asked my previous boss, the owner of the company I was working for, for a raise. And he said "I think you deserve a raise, but if you give it to you, you'll have to pay more in taxes". To which I said "Great!" I still don't know if he was BS'ing me or not.

Regularly I'll hear the hourly guys complain, "I worked all this over time, and taxes ate it all".

This flawed perception seems to apply across the board "If you earn more, you'll have to pay more, so don't". Does this idea exist else where or only here in the south?

[jenn_jenn]

I’ve heard similar comments from various people in my life, including a college professor.

People forget we have a marginal income tax rate and/or don’t understand how that works.

There are times though where it matters for other things aside from income tax. For example, in my area if your household makes less than $500k/yr you get a reduction on property taxes. Making $501k would be worse than making $499k for that reason. I’m sure there are other examples similar to this.

But in my experience, these are not the kind of considerations people are talking about. They just don’t understand or forget how a marginal income tax rate works.

[ua_guy]

There's some truth to it, but it's a very specific situation, and is often seen in married households where one earner makes a lot more than the other. The amount of the raise is equivalent to, or less than, the actual amount needed to cover the additional taxes owed-- how that factors into the overall return for the year is less clear because of so many individual factors.

But I'm also not sure that is a reason to forego a raise or promotion since the idea is....keep making more money. Hopefully the situation is only temporary. There's a penchant to use some very fuzzy math when it comes to talking about Uncle Sam. Your friend's statement is akin to the people who believe that gas prices are high because of taxes. Not quite - even with all taxes removed, gas prices are still astronomically high.

[disneysteve]

Does this idea exist else where or only here in the south?

No, it's like that everywhere. Most people have no understanding of how our marginal tax system works. I've heard it many times.

I'm sure I've told this story before but back when I was a resident, some of my fellow residents refused to take moonlighting jobs that paid very well ($50/hr back in 1992) because the extra income would put them into a higher tax bracket. I said bring it on, and worked as many moonlighting hours as I could manage.

My father, who was an accountant, always said it's better to earn the money and pay the taxes than to not earn the money.

All of that said, there are some specific circumstances where it's not true, as jenn_jenn alluded to. Sometimes earning even $1 over the cap for something can make the extra income not worth it.

[myrdale]

My father, who was an accountant, always said it's better to earn the money and pay the taxes than to not earn the money.

I do like that.

I have heard other's talk about not wanting to earn income because it would mess up benefits, welfare or disability. But that seems like it is less out of ignorance, and more out of... I don't know what.

[disneysteve]

I do like that.

I have heard other's talk about not wanting to earn income because it would mess up benefits, welfare or disability. But that seems like it is less out of ignorance, and more out of... I don't know what.

Out of a screwed up system generally.

I worked in a poor area for many years and I saw this regularly. People knew that if they earned an extra few dollars, they would completely lose their Medicaid coverage. It creates a very powerful disincentive to work more. I've always felt there should be a sliding scale so that your benefits decrease gradually as your income rises rather than being all or nothing. If my choice is earning an extra $1,000 or keeping health insurance for me and my family, I'm choosing the insurance for sure.

I have a coworker who is collecting SS. She never picks up extra shifts because of the benefits penalty for earning more than a certain amount. She's not opposed to working more, but why do it if it's going to result in her SS check shrinking?

[Fishindude77]

Heard that moaning and groaning a lot from hourly guys when they put in a bunch of overtime. Many were so used to (relied on for savings) getting tax refunds every year they intentionally had the company taking out more deductions than necessary so it hit pretty hard on those heavy OT pay periods. Of course, the end result was a larger tax refund following year end, but that never got mentioned.

[disneysteve]

Heard that moaning and groaning a lot from hourly guys when they put in a bunch of overtime.

I hear it when bonuses come out, too. It's a friggin bonus. It's not even something you worked extra hours for. Just pay your taxes and be grateful that they gave you a bonus.

[LivingAlmostLarge]

Uh I see that all the time especially right now. I pointed out to someone they made $60k more than last year and are whining about paying $15k in income taxes. Okay so wanna give back you $60k? I tell everyone it's better to make more and owe more.

That being said i agree 100% with Disneysteve about how it's better to have benefits decrease by income instead of all or nothing. It's hard for say older retirees affording property taxes but if you go over $58k you don't get the senior exemption. So it's way better to earn $57.5k instead of $59k. KWIM? Then they lose their 50% senior exemption for property taxes or lower utility bills.

[bjl584]

Out of a screwed up system generally.

I worked in a poor area for many years and I saw this regularly. People knew that if they earned an extra few dollars, they would completely lose their Medicaid coverage. It creates a very powerful disincentive to work more. I've always felt there should be a sliding scale so that your benefits decrease gradually as your income rises rather than being all or nothing. If my choice is earning an extra $1,000 or keeping health insurance for me and my family, I'm choosing the insurance for sure.

I have a coworker who is collecting SS. She never picks up extra shifts because of the benefits penalty for earning more than a certain amount. She's not opposed to working more, but why do it if it's going to result in her SS check shrinking?

A friend of mine receives benefits and refuses to work because if he did, then he would lose them.
He lost one of his eyes back in his teens and now receives SSI, or something similar.
But, it's not much. Probably less than $1000 a month.
He'd never be able to make it on his own, as he still lives with his parents.
He will only work side gigs that are under the table.

If he'd get a legit job he'd triple his income, but I guess it's easier to do nothing.
That, and he has a social worker who "coaches" him to stay a part of the system.

He is like your old clients.
Earning anything over X, and he will lose all his benefits, health coverage, food stamps. All of it, gone.
A sliding scale would probably incentivize him to work

[moneybags]

It can come in to play if you are evaluating whether having 1 parent stay at home. If the second income is considered taxed at the higher bracket and daycare, work costs, etc. are evaluated, it can sway the decision.