The "Marginal Tax" Myth

Many people refuse a raise or overtime because they think moving into a "higher tax bracket" means their entire income is taxed at that higher rate. This is false.

Tax Brackets are like buckets.

• The first bucket of money (e.g., $0 - $11,000) is taxed at 10%.
• The next bucket (e.g., $11,001 - $44,000) is taxed at 12%.
• Only the money that overflows into the next bucket gets taxed at the higher rate. Your first $11,000 is still taxed at 10%.

Conclusion: Earning more money will ALWAYS result in more take-home pay. Never turn down a raise for tax reasons.

Definitions

• Marginal Rate: The tax rate applied to the very last dollar you earned.
• Effective Rate: The actual percentage of your total income that goes to the IRS. This is always lower than your marginal rate.