Return to the Household Finances Forum | Post a Follow-Up

 o
Can a pay raise result in less pay??? (taxes)

Posted by behaviorkelton (My Page) on
Sun, Aug 19, 07 at 14:57

I'm considering working a little on the side. It is possible that this will put me in the next higher tax bracket.

I'm not sure, but I think I have overheard conversations that suggest that it is possible to make less if your *just* edges over the next higher tax bracket.

So is there any advantage to keeping one's pay just a touch under the next bracket?


Follow-Up Postings:

 o
RE: Can a pay raise result in less pay??? (taxes)

no, no ,no. That is such an old myth. If your extra income pushes you into a new bracket, you will only be taxed at that rate on the money that goes over. There is no advantage to keeping your pay under the next bracket.

I don't know where the idea comes from that you can lose money by making more. It must be from the same source that gave us "working 9 - 5" Don't most of us work 8 -5?


 o
RE: Can a pay raise result in less pay??? (taxes)

Yes, I thought so... but I've never had to be concerned about that next bracket up!

It sounds sort of like:
"I don't want my mortgage to be too low or I lose the interest tax deduction"
That never made sense to me either.

However, given the complexity of the IRS and the goofiness of gov't regulations... I figured it might be possible for someone to actually make less because they make more!

Thanks


 o
RE: Can a pay raise result in less pay??? (taxes)

devorah, I think this myth is a hang-over from the pre-Reagan days when the top tax rates were 70%. Back in the 50's,60's and 70's many people took the view that once you cross the 50% bracket you are working more for the benefit of the government then yourself, so why bother. In the 50's and early 60's the top rate was 91% so I could imagine at some point around 70%, one has to say, no thanks to making more money since the reward was not worth the effort. Remember these taxes were charged on earned income and not investment income.


 o
RE: Can a pay raise result in less pay??? (taxes)

Keep in mind that your side business will have its own accounting and taxation rules. My ex sold "party goods" for several years. While we did earn some income from that, it was offset by business expenses (inventory, writeoffs, mileage, etc.) for several years.


 o
RE: Can a pay raise result in less pay??? (taxes)

If the side income is from an independent business or work as an independent contractor, you'll also have to pay self employment taxes (both the employer and employee portions of social security and Medicare) of about 15% of income in addition to state and federal income taxes on the money you make after expenses.

Plan on filling out a schedule C with your 1040 as well.


 o
RE: Can a pay raise result in less pay??? (taxes)

Richard,
Thanks... darn.. I didn't consider that. I'll have to calculate that additional 15% and see if I still feel like giving up my free time!


 o
RE: Can a pay raise result in less pay??? (taxes)

Do watch out for the Alternative Minimum Tax. Tweaking your income can hurt if you are close to that kicking in.

And if you do start a side business, you will have to decide at the get go whether to set up your accounting to be "cash based" vs. based on product/inventory. (Cash based is simpler in that all that matters is what you collect - not what you bill, not what you are owed, just the cash you get. You deduct your expenses and pay tax on the net. No writing off losses.)


 o
RE: Can a pay raise result in less pay??? (taxes)

For us, the additional income of me working a temp assignment put us into a higher tax bracket. I made a whopping $8K last year, married filing jointly. When I input dh's tax info into TurboTax, we were getting a $2K refund. Entered mine and it came out that we owed a small amount.

Now, I did make $8K last year and we lost a $2K refund, so we were $6K ahead, but there's something about owing money to Uncle Sam that really bites.

Can someone please explain the AMT in layman's terms? I hear that people get *stuck* with it. The title makes it sound like it's somewhat of a benefit. What conditions does one have to meet in order to be tacked the AMT?


 o
RE: Can a pay raise result in less pay??? (taxes)

The AMT is a completely different income tax calculation that excludes most deductions and exemptions and uses different tax rates. You're supposed to calculate your tax both ways and pay which ever is higher, and all of the tax software packages will do this automatically.

The people who pay it most often are those with a lot of deductions for things like state income taxes, property taxes, etc. Since those deductions are disallowed under the AMT, their AMT tax amount is usually higher than their regular tax amount. It rarely effects people making less than $75,000 or so.

Here is a link that might be useful: http://en.wikipedia.org/wiki/Alternative_Minimum_Tax


 o
RE: Can a pay raise result in less pay??? (taxes)

Sparksals, had the right amount of tax been withheld from your 8k earnings? If they taxed you as though that was all your earnings, almost nothing would be withheld. (federal tax bite up to 15,650 is 0). But since you file jointly, all your dollars came on top of DH's, and therefore all are subject to the tax rate HIS income topped out at. (within the couple, he already benefited from lower rates on his initial dollars earned) That then is 15% of every dollar over 15,000 or 25% of every dollar over 64,000. So if little or nothing was withheld, that 2000 sounds like a 25% hit on your 8k. Think that is maybe what happened?

The Alternative Minimum tax was implemented in 1969 to keep high income people from avoiding taxes by claiming huge deductions. Deduct too much relative to your earnings and the IRS says "Nope" and hits you with the AMT. Problem is, this was all laid out with income and deduction numbers that have not adjusted for inflation. Salaries have risen, as have deductions (higher mortgages, home equity loans, etc), and a threshold of 40,000 is not the upper income threshold it was in 1969. ATM used to kick in for less than 1% of filers. Current estimates are it will affect 20% of filers by 2010.

Here is a link that might be useful: IRS ATM info


 o
RE: Can a pay raise result in less pay??? (taxes)

While I have myself paid the ATM several times, I don't think it's a bad thing. Without it, people from states with low or no state income tax would share a disproportionately high proportion of the Federal tax burden. People shouldn't be able to completely deduct their way out of paying income taxes.


 o
RE: Can a pay raise result in less pay??? (taxes)

One other thing to note is that once you get to a certain income level you can no longer contribute to a Roth IRA.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Household Finances Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here