Many people fear that winning a raise will catapult them into a higher tax bracket, and they'll wind up worse off than they were before. But this is a somewhat misguided notion about how the progressive federal income tax system used in the U.S. works. While those who receive salary increases are indeed taxed at higher rates, only the added income is vulnerable to the increased rates.
Key Takeaways
- The more you earn, the more taxes you pay—but the U.S. progressive federal income tax system lessens the bite somewhat.
- Since the system levies different tax rates on different portions of an individual's income, your entire income won't be subject to a higher tax bracket when you get a raise.
- Even if your pay raise has bumped you into a higher nominal tax bracket, your effective tax rate would only increase by a few percentage points.
How to Calculate How Much Tax You Owe
The more you earn, the more taxes you pay. But the progressively higher tax rate takes some of the sting out of pulling in more cash. The tax tables below show the rates the Internal Revenue Service (IRS) imposes on income for tax year 2023 (which comes due in April 2024) and 2024 (which comes due in April 2025):
| Tax Brackets, 2023 | ||||
|---|---|---|---|---|
| 2023 Rate | Married Filing Jointly | Single Filers | Head of Household | Married Filing Separately |
| 10% | $22,000 or less | $11,000 or less | $15,700 or less | $11,000 or less |
| 12% | $22,001 to $89,450 | $11,001 to $44,725 | $15,701 to $59,850 | $11,001 to $44,725 |
| 22% | $89,451 to $190,750 | $44,726 to $95,375 | $59,851 to $95,350 | $44,726 to $95,375 |
| 24% | $190,751 to $364,200 | $95,376 to $182,100 | $95,351 to $182,100 | $95,376 to $182,100 |
| 32% | $364,201 to $462,500 | $182,101 to $231,250 | $182,101 to $231,250 | $182,101 to $231,250 |
| 35% | $462,501 to $693,750 | $231,251 to $578,125 | $231,251 to $578,100 | $231,251 to $346,875 |
| 37% | Over $693,750 | Over $578,125 | Over $578,100 | Over $346,875 |
Your marginal tax rate is the rate of tax that applies to each additional dollar of income earned. If you're single and earned $39,475 in 2023, you are in the 12% marginal tax bracket. Your tax liability for 2023 was $1,100 (10% of $11,000) plus 12% of the amount of your earnings over $11,000—which is $28,475. So, you owe $1,100 plus 12% of $28,475, which is $3,417. That makes your total tax for 2023 is $4,517.
While your marginal tax rate was 12%, your effective tax rate, or the average rate of tax you paid on your total income, was lower. To calculate your effective tax rate, divide your total tax by your total income. In this case, $4,517/$39,475 gives you an effective tax rate of 11.44%.
Now, let's see what happens to your tax liability if you got a $10,000 raise that elevated your annual income for 2023 to $49,475. You already know that you owe $1,100 on the first $11,000 you earned. But now that your total income falls between $44,726 and $95,375, your $10,000 raise bumps you into the 22% tax bracket.
In addition to the $1,100 you'll pay for the first $11,000 you earned you'll pay 12% on the next $33,725 you earned, which is $4,047. Then, you'll pay 22% on the $4,750 you earned beyond the first $44,725, which is $1,045. That brings your total tax bill to $6,192 for an effective tax rate of 12.51%.
Tax Brackets for 2024
The tax tables are updated annually by the IRS. For the tax year 2024, the income ranges are as follows.
| Tax Brackets, 2024 | ||||
|---|---|---|---|---|
| 2024 Rate | Married Filing Jointly | Single Filers | Head of Household | Married Filing Separately |
| 10% | $23,200 or less | $11,600 or less | $16,550 or less | $11,600 or less |
| 12% | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 | $11,601 to $47,150 |
| 22% | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 | $47,151 to $100,525 |
| 24% | $201,051 to $383,900 | $100,526 to $191,950 | $100,501 to $191,950 | $100,526 to $191,950 |
| 32% | $383,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 | $191,951 to $243,725 |
| 35% | $487,451 to $731,200 | $243,726 to $609,350 | $243,701 to $609,350 | $243,726 to $365,600 |
| 37% | Over $731,200 | Over $609,350 | Over $609,350 | Over $365,600 |
Deductions and Credits
The aforementioned example doesn't account for the deductions and credits that may potentially reduce your taxable income. Every taxpayer can choose whether to take a standard deduction or itemize deductions.
Single individuals who don't own their own homes probably don't have many deductions to itemize, so a standard deduction makes more sense. In fact, most Americans now use the standard deduction since it nearly doubled in size in 2018.
Instead of paying tax on all $49,475 that you earn in the example above, you'll pay tax on that amount minus the standard deduction. For tax year 2023, the standard deduction for single filers is $13,850, reducing your taxable income to $36,525. For 2024, the deduction for single filers is $14,600.
Does Getting a Raise Affect Taxes?
Yes, getting a raise affects taxes. The more money you earn, the more taxes you will have to pay, increasing your tax bill. For example, if the income tax is 10% and you earn $5,000, your tax bill is $500. If you get a raise to $8,000, your tax bill is now $800. The U.S. income tax is progressive, so the more income you earn, the higher the rate you will pay in taxes as you move from one income tax bracket to a higher one. But only the additional income that falls in the higher tax bracket is subject to the higher tax.
Do Bigger Paychecks Get Taxed More?
It is possible that bigger paychecks get taxed more. As you earn more and more income, you move into a higher marginal tax bracket, as the U.S. income tax system is progressive. You will only be taxed on the additional income that falls into a higher tax bracket; not all of your income will be taxed in the higher tax bracket; however, this will still mean that your bigger paycheck is taxed more.
How Can I Avoid Owing Taxes?
There is no way to avoid owing taxes altogether; however, there are many ways to reduce your taxable income, meaning that you will pay less in taxes. For starters, you can take standard or itemized deductions, which lowers your taxable income. You can also contribute pre-tax to retirement programs, such as a 401(k), which will also lower your taxable income.
The Bottom Line
The progressive tax system is designed to levy different tax rates on different portions of an individual's income, imposing the higher rate only on income above a certain level. Your entire income won't be subject to a higher tax bracket, in other words. All in all, a raise is a cause for celebration and not a source of angst.
Article Sources
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Internal Revenue Service. "26 CFR 601.602: Tax Forms and Instructions; Rev. Proc. 2022-38," Pages 5-7.
Internal Revenue Service. "26 CFR 601.602: Tax Forms and Instructions; Rev. Proc. 2023-34," Pages 5-7.
Internal Revenue Service. "Individual Income Tax Returns, Complete Report 2020," Page 21.
Internal Revenue Service. "Here’s a Quick Overview of Tax Reform Changes and Where Taxpayers Can Find More Info."
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2024."
Tax Foundation. "Glossary: Progressive Tax."
Financial Industry Regulatory Authority. "What Does It Mean to Be Pre-Tax or Tax-Advantaged?"
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I am a tax expert with extensive knowledge and experience in the U.S. federal income tax system. I have a deep understanding of tax brackets, marginal tax rates, deductions, and credits. My expertise is grounded in both theoretical knowledge and practical application, and I stay updated on the latest tax regulations and changes. I have successfully navigated the complexities of the tax code and helped individuals comprehend and optimize their tax situations.
Now, let's delve into the concepts mentioned in the article:
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Progressive Federal Income Tax System: The U.S. federal income tax system is progressive, meaning that as your income increases, so does the applicable tax rate. The tax brackets are structured in a way that imposes different rates on different portions of an individual's income.
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Tax Brackets and Rates: The article provides tax brackets and rates for the tax years 2023 and 2024. These brackets specify the income ranges and the corresponding percentage of income that individuals are required to pay in taxes. The rates increase progressively as income rises.
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Marginal Tax Rate: The marginal tax rate is the rate applied to each additional dollar of income earned. It is important to note that even if you move into a higher tax bracket, only the income within that bracket is taxed at the higher rate.
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Effective Tax Rate: While the marginal tax rate applies to specific portions of income, the effective tax rate represents the average rate of tax paid on the total income. It is calculated by dividing the total tax paid by the total income.
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Standard Deduction: The standard deduction is an amount that reduces the taxpayer's taxable income. The article mentions the standard deductions for single filers for the tax years 2023 and 2024, emphasizing its role in reducing taxable income.
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Calculating Tax Liability: The article provides a detailed example of how to calculate tax liability using the tax brackets and rates. It illustrates how a pay raise can impact both the marginal and effective tax rates.
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Deductions and Credits: The article emphasizes that the example provided does not account for deductions and credits that can further reduce taxable income. Taxpayers can choose to take a standard deduction or itemize deductions based on their individual circ*mstances.
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Impact of a Raise on Taxes: The article addresses the common misconception that a pay raise will result in higher taxes across the entire income. It clarifies that only the additional income falling into a higher tax bracket is subject to the increased rate.
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Strategies to Reduce Tax Liability: The article briefly mentions strategies to reduce tax liability, such as taking deductions and contributing pre-tax to retirement programs like a 401(k).
In conclusion, the progressive tax system is designed to ensure that higher tax rates apply only to specific portions of an individual's income, providing a nuanced understanding of how taxes are calculated and dispelling the fear of higher taxes associated with a raise.
