Please share examples where earning an extra $1 can cost more in taxes than income.

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
sai
Posts: 182
Joined: Tue Apr 15, 2014 12:09 pm

Please share examples where earning an extra $1 can cost more in taxes than income.

Post by sai » Fri Feb 05, 2016 12:57 pm

Few I got now are:
rkhusky wrote:The child tax credit can cause your taxes to increase by $50 for $1 more in income.
randomguy wrote:
Spewin wrote:The Affordable Care Act Subsidy can add $10,000 to one's tax bill for a single dollar extra income. (in the right circumstances).
Technically that isn't a tax. It is a loss of premium support.:) The real world result is the same.

There are several cut off points for various credits that can cause increases in taxes more than the value of income. OP initial example though isn't one of them.

FullYellowJacket
Posts: 324
Joined: Thu Apr 03, 2014 8:21 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by FullYellowJacket » Fri Feb 05, 2016 1:00 pm

I'm thinking getting pushed into AMT territory could do it.

The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by The Wizard » Fri Feb 05, 2016 1:10 pm

The Medicare IRMAA brackets...
Attempted new signature...

Louverture
Posts: 39
Joined: Wed Jan 20, 2016 10:54 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Louverture » Fri Feb 05, 2016 3:38 pm

A married couple going from $36,500 to $36,501 (AGI) could cost them a $600 tax credit--possibly $1,200 if they can both get the credit which seems to be the case (Saver's Credit).

hnzw rui
Posts: 578
Joined: Tue Sep 22, 2015 2:26 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by hnzw rui » Fri Feb 05, 2016 4:04 pm

Louverture wrote:A married couple going from $36,500 to $36,501 (AGI) could cost them a $600 tax credit--possibly $1,200 if they can both get the credit which seems to be the case (Saver's Credit).
+1. Had some experience with this preparing parents' income tax return. Had to make some tIRA contributions to get them the max credit.

trirod
Posts: 105
Joined: Wed Jul 18, 2007 11:54 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by trirod » Fri Feb 05, 2016 4:15 pm

If you go from $399 of self employment income to $400, that would cost you about $57 in SE tax.

User avatar
dodecahedron
Posts: 4908
Joined: Tue Nov 12, 2013 12:28 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by dodecahedron » Fri Feb 05, 2016 4:24 pm

Many places have property tax exemptions for senior citizens with incomes below a certain cutoff. One more dollar of income at the cutoff could mean thousands in extra property taxes.

Topic Author
sai
Posts: 182
Joined: Tue Apr 15, 2014 12:09 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by sai » Fri Feb 05, 2016 4:29 pm

Grogs wrote: Yep, I fell into that trap once. I paid off my student loans, including the interest that had been deferred, the first full year after grad school. When I went to file, I found my annual income was something like $200 over the threshold and I lost about $2k in credits. IMO, that should never happen and credits should always be phased out gradually, but unfortunately they don't consult me when writing the tax code. :happy

jebmke
Posts: 9978
Joined: Thu Apr 05, 2007 2:44 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by jebmke » Fri Feb 05, 2016 4:31 pm

I'd have to check but I think there are some cliffs in the EIC tables.
When you discover that you are riding a dead horse, the best strategy is to dismount.

dukeblue219
Posts: 40
Joined: Fri Jan 29, 2016 12:40 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by dukeblue219 » Fri Feb 05, 2016 4:33 pm

FullYellowJacket wrote:I'm thinking getting pushed into AMT territory could do it.
How? I wouldn't think so since AMT is calculated in parallel and then you simply pay the higher tax. Even if that $1 pushed you into AMT it shouldn't affect the AMT amount by more than $1 unless I'm missing something.

User avatar
dm200
Posts: 22876
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by dm200 » Fri Feb 05, 2016 4:35 pm

dodecahedron wrote:Many places have property tax exemptions for senior citizens with incomes below a certain cutoff. One more dollar of income at the cutoff could mean thousands in extra property taxes.
Yes - that is absolutely true in my jurisdiction. My wife and I are recipients of such a very significant benefit.

randomguy
Posts: 8514
Joined: Wed Sep 17, 2014 9:00 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by randomguy » Fri Feb 05, 2016 5:16 pm

dukeblue219 wrote:
FullYellowJacket wrote:I'm thinking getting pushed into AMT territory could do it.
How? I wouldn't think so since AMT is calculated in parallel and then you simply pay the higher tax. Even if that $1 pushed you into AMT it shouldn't affect the AMT amount by more than $1 unless I'm missing something.
It wouldn't. Your dollar might be taxed at a high rate (a function of the phaseout and AMT taxes) but you will not pay more in taxes.


Medicare has some cliffs (see part B+D premiums) if you count those as taxes. Several of the programs like SNAP, EITC, and a few other have cliffs if you consider those taxes.

For fun there are cliffs where earning 1 dollar more GETS you a big benefit. ACA for example has both a top cliff (you lose the subisdy) and a bottom subsidy (you lose the subsidy).

ducksauce9
Posts: 24
Joined: Mon Jun 02, 2014 10:12 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by ducksauce9 » Fri Feb 05, 2016 5:37 pm

280(g) parachute payment excise tax for a dollar of extra income over the 3x threshold

User avatar
dodecahedron
Posts: 4908
Joined: Tue Nov 12, 2013 12:28 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by dodecahedron » Fri Feb 05, 2016 5:49 pm

randomguy wrote:
dukeblue219 wrote:
FullYellowJacket wrote:I'm thinking getting pushed into AMT territory could do it.
How? I wouldn't think so since AMT is calculated in parallel and then you simply pay the higher tax. Even if that $1 pushed you into AMT it shouldn't affect the AMT amount by more than $1 unless I'm missing something.
It wouldn't. Your dollar might be taxed at a high rate (a function of the phaseout and AMT taxes) but you will not pay more in taxes.


Medicare has some cliffs (see part B+D premiums) if you count those as taxes. Several of the programs like SNAP, EITC, and a few other have cliffs if you consider those taxes.

For fun there are cliffs where earning 1 dollar more GETS you a big benefit. ACA for example has both a top cliff (you lose the subisdy) and a bottom subsidy (you lose the subsidy).
Agree with most of the above, but EITC does not have a cliff with respect to income. It has a gradual phase-out. Another dollar of AGI in the phase-out range will typically reduce EITC by something like 21 cents. (On the other hand, EITC does have a cliff with respect to investment income. Someone could be entitled to thousands of dollars in EITC based on their earned income/AGI. Another dollar of most types of income would reduce the EITC only very slightly. But another dollar of investment income--going from $3,400 to $3,401 could suddenly erase the whole EITC.)

SNAP is administered by the states, and can vary from state to state, so I don't know enough to say whether there might be SNAP cliffs, but I am not aware of any.

corpgator
Posts: 23
Joined: Wed Jul 22, 2015 12:00 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by corpgator » Fri Feb 05, 2016 7:27 pm

The savers credit. If you go from $61000 joint AGI to $61001, you lose $400. There are other jumps like that as well with the credit.

Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Wagnerjb » Fri Feb 05, 2016 10:26 pm

corpgator wrote:The savers credit. If you go from $61000 joint AGI to $61001, you lose $400. There are other jumps like that as well with the credit.
I agree, and I have seen that effect on my son's tax return. I use a traditional IRA contribution (in his name) to reduce his income just below the closest cutoff point. Since I can make the IRA contribution for him in April 2016 (for 2015 tax year), I can adjust the income pretty precisely.

Best wishes.
Andy

User avatar
dm200
Posts: 22876
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by dm200 » Sat Feb 06, 2016 10:29 am

In most cases, I think, these kinds of "situations" are unfortunate and provide a "disincentive" for individuals to work, earn more money or improve their net or future economic well being. I doubt that is the intent of such "situations", but are unintended consequences.

User avatar
SpringMan
Posts: 5412
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by SpringMan » Sat Feb 06, 2016 10:46 am

I know there are exceptions but I never quite understood the commonly given advice to carefully watch going into a higher tax bracket. Isn't it true that the more you make the more you get with exceptions, many of which are pointed out in this thread. Only the dollars earned above the previous tax bracket are taxed at the higher one. I hear advisors say be careful when converting IRAs to Roths not to put you in a higher bracket. They say this like all your income is taxed at the higher percentage when only the amount over is. If the amount over is relatively small, it is no big deal IMO.
Best Wishes, SpringMan

rkhusky
Posts: 7831
Joined: Thu Aug 18, 2011 8:09 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by rkhusky » Sat Feb 06, 2016 11:20 am

SpringMan wrote:I know there are exceptions but I never quite understood the commonly given advice to carefully watch going into a higher tax bracket. Isn't it true that the more you make the more you get with exceptions, many of which are pointed out in this thread. Only the dollars earned above the previous tax bracket are taxed at the higher one. I hear advisors say be careful when converting IRAs to Roths not to put you in a higher bracket. They say this like all your income is taxed at the higher percentage when only the amount over is. If the amount over is relatively small, it is no big deal IMO.
I think the reason is that one could use that income next year in the lower bracket. You are right though, in that, if one goes slightly over the boundary, the result is only a few extra dollars in taxes. But if you go $1000's over, then you could be needlessly paying substantially more tax than you need to.

User avatar
dm200
Posts: 22876
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by dm200 » Sat Feb 06, 2016 11:25 am

SpringMan wrote:I know there are exceptions but I never quite understood the commonly given advice to carefully watch going into a higher tax bracket. Isn't it true that the more you make the more you get with exceptions, many of which are pointed out in this thread. Only the dollars earned above the previous tax bracket are taxed at the higher one. I hear advisors say be careful when converting IRAs to Roths not to put you in a higher bracket. They say this like all your income is taxed at the higher percentage when only the amount over is. If the amount over is relatively small, it is no big deal IMO.
Yes - going into a higher tax bracket only subjects the increment to the higher rate. It is (with some exceptions, as noted elsewhere) a common (INCORRECT) myth that earning more will be more than offset by increased income taxes because of moving into a higher "bracket".

CantPassAgain
Posts: 577
Joined: Fri Mar 15, 2013 8:49 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by CantPassAgain » Sat Feb 06, 2016 12:02 pm

SpringMan wrote:I know there are exceptions but I never quite understood the commonly given advice to carefully watch going into a higher tax bracket. Isn't it true that the more you make the more you get with exceptions, many of which are pointed out in this thread. Only the dollars earned above the previous tax bracket are taxed at the higher one. I hear advisors say be careful when converting IRAs to Roths not to put you in a higher bracket. They say this like all your income is taxed at the higher percentage when only the amount over is. If the amount over is relatively small, it is no big deal IMO.
If you are .01 away from the 25% tax bracket before converting a traditional IRA to a Roth then you will be paying 25% on the entire conversion amount. IMO paying 25% instead of 15% (or 28% instead of 25%, 33% instead of 28%, etc etc) is painful, especially if the IRA is large.

It is very good advice to watch your tax brackets carefully when doing IRA conversions, and spread them out wisely.

User avatar
SpringMan
Posts: 5412
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by SpringMan » Sat Feb 06, 2016 12:26 pm

CantPassAgain wrote: If you are .01 away from the 25% tax bracket before converting a traditional IRA to a Roth then you will be paying 25% on the entire conversion amount. IMO paying 25% instead of 15% (or 28% instead of 25%, 33% instead of 28%, etc etc) is painful, especially if the IRA is large.

It is very good advice to watch your tax brackets carefully when doing IRA conversions, and spread them out wisely.
My point being if one is only a small amount into the higher tax bracket AFTER converting, the higher bracket applies only to the small amount over. Of course you may not want to do a conversion if you are already bumping up against a higher bracket. You should do what makes sense and don't ignore tax brackets. However, it seems like many people, sometimes even advisors, speak like going into a higher tax bracket affects all you income, not just the delta that exceeds the previous bracket.
Best Wishes, SpringMan

OutInThirteen
Posts: 381
Joined: Thu Mar 14, 2013 2:11 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by OutInThirteen » Sat Feb 06, 2016 10:12 pm

I'm surprised nobody has posted this easy one yet - if you're using the tax tables (taxable income <$100K), $1 more in taxable income can result in $10 more income tax.

CFM300
Posts: 1644
Joined: Sat Oct 27, 2007 5:13 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by CFM300 » Sun Feb 07, 2016 12:07 am

SpringMan wrote:...if one is only a small amount into the higher tax bracket AFTER converting, the higher bracket applies only to the small amount over.
But increasing your tax bracket also increases your short-term capital gains tax rate, since the two are the same. Also, sliding into the 25% tax bracket increases your long-term capital gains tax rate from 0% to 15%.

lhl12
Posts: 643
Joined: Mon May 27, 2013 8:24 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by lhl12 » Sun Feb 07, 2016 7:47 am

It's not income tax, but there is an egregious example of this in the Massachusetts estate tax, which is zero for all estates up to $1 million, then becomes 3.32% for an estate valued at $1,000,001. So, for one dollar of incremental value your estate owes $33,200 in tax.

User avatar
LadyGeek
Site Admin
Posts: 58676
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by LadyGeek » Sun Feb 07, 2016 11:19 am

This thread is now in the Personal Finance (Not Investing) forum (taxes).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

shelanman
Posts: 509
Joined: Tue Feb 27, 2007 8:35 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by shelanman » Sun Feb 07, 2016 3:38 pm

dukeblue219 wrote:
FullYellowJacket wrote:I'm thinking getting pushed into AMT territory could do it.
How? I wouldn't think so since AMT is calculated in parallel and then you simply pay the higher tax. Even if that $1 pushed you into AMT it shouldn't affect the AMT amount by more than $1 unless I'm missing something.
Getting into AMT territory won't do it, but crossing the AMT rate threshold does. AMT has two rates, but no brackets. It's just, if AMT income is <$185,000, pay 26%, otherwise pay 28%. $1.00 of extra income costs you $3,700 in extra AMT

edit: apparently, they changed this with the big "permanent AMT patch", and now you get to subtract that $3700 if you get stuck with the higher rate.

trueblueky
Posts: 1649
Joined: Tue May 27, 2014 3:50 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by trueblueky » Sun Feb 07, 2016 4:43 pm

If you receive ACA health insurance subsidy, 400% of the poverty level means you have to pay it all back, while 399% limits how much you'd pay back if any.

Mr Rosco
Posts: 40
Joined: Thu Nov 28, 2013 8:24 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Mr Rosco » Sun Feb 07, 2016 6:05 pm

Let's say during the last pay period of the year you go $1 into the 25% bracket. Does all your 401k or traditional iras get taxed at 25% then?

randomguy
Posts: 8514
Joined: Wed Sep 17, 2014 9:00 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by randomguy » Sun Feb 07, 2016 6:10 pm

Mr Rosco wrote:Let's say during the last pay period of the year you go $1 into the 25% bracket. Does all your 401k or traditional iras get taxed at 25% then?
Depends on what you are asking

1) normal income gets you into the 25% bracket by 1 dollar. Any money taken out of the ira is taxed at 25%+
2) if you are contributing, effectively all the money is done at 25%. But if you didn't have that 1 dollar, it would still have be deducted at 25% since if you contributed one dollar less, it would be enough to get you into the 25% bracket.

Seriously if you don't understand how graduate tax brackets work (and from the posts on this board a lot of people seem to struggle with it), sit down and see how the taxes change as you add income in. Start at like 50k and then just start adding 5k. Compute the marginal (i.e. the taxes on the 5k) and effective (percentage of total). It is pretty instructive to understand how the tax burden goes up quickly as income rises.

drawpoker
Posts: 2809
Joined: Mon May 19, 2014 6:33 pm
Location: Delmarva

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by drawpoker » Sun Feb 07, 2016 7:25 pm

dodecahedron wrote:Many places have property tax exemptions for senior citizens with incomes below a certain cutoff. One more dollar of income at the cutoff could mean thousands in extra property taxes.
In Maryland the state Homeowners Property Tax Credit program is open to anyone, regardless of age, as long as they fall within the income rules, and the total of their taxable accounts does not exceed $200,000. (Maximum gross income allowed is $60,000) Certain counties, not all, have adopted their own separate tax credit program just for senior citizens on top of the state program.

($60K sounds generous, but it isn't really. The state counts all forms of gross income, including social security, tax-exempt interest/dividends, gifts over $300, even Roth distributions.)

gvsucavie03
Posts: 1408
Joined: Sat Feb 16, 2013 8:30 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by gvsucavie03 » Sun Feb 07, 2016 8:36 pm

Credit phase-outs "down low" as mentioned above. Won't keep me from wanting to earn more, but it does stink. If one is on the cusp and eligible, definitely contribute to a TIRA if it lowers income enough to get a credit.

User avatar
White Coat Investor
Posts: 14327
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by White Coat Investor » Mon Feb 08, 2016 12:02 pm

I just wanted to say this is a great thread. One of the best I've read in a while. Who knew there would be so many examples?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

TedSwippet
Posts: 2571
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by TedSwippet » Mon Feb 08, 2016 1:00 pm

US 'expatriation tax', applies to departing citizens and green-card holders when net worth exceeds $2m. At the threshold you can bounce in and out with stock market gyrations, home valuations, and so on.

Going $1 over could cost you 39.6% of your retirement savings, in addition to possible MTM tax on unrecognized capital gains. Stay $1 under and you avoid it all.

Elemental
Posts: 154
Joined: Fri Feb 06, 2009 5:08 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Elemental » Mon Feb 08, 2016 1:12 pm

I'm a victim of this for the 2015 tax year. I hit the child tax credit phase out. It sure takes the shine off that extra income to know it cost me $250 in tax credits to earn that extra little bit of income.

I really feel like I wasted my time working that late-night self-employment side job in the end, because I made much less than my hourly rate after factoring in the loss of the child tax credit. In researching how to lower my AGI after the end of 2015 has already past, I discovered I could contribute 25% of that self-employment income into my Rollover IRA as a SEP-IRA contribution. Sadly it isn't enough to get back any of the child tax credit I lost.

Really, in the end, I can blame reaching the phase-out on that last bit of income from any income source. Should I blame my CD interest that earned that last bit of income? Should I blame that tiny bit of self-employment income? Maybe that Chase bank bonus for opening a new account? Yeah... that wasn't worth it.

Edit: I just checked my actual taxes, and it turns out that my last $150 in income cost me $50 in phase-out credits. So, I don't strictly meet the subject of this post. However, though I am in the %15 marginal tax bracket, I'll say my "effective marginal tax bracket" is 33% because that is the "tax" I paid on my very last $150 in income. It could have been worse. :wink:
Last edited by Elemental on Mon Feb 08, 2016 1:54 pm, edited 1 time in total.

gvsucavie03
Posts: 1408
Joined: Sat Feb 16, 2013 8:30 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by gvsucavie03 » Mon Feb 08, 2016 1:19 pm

Elemental wrote:I'm a victim of this for the 2015 tax year. I hit the child tax credit phase out. It sure takes the shine off that extra income to know it cost me $250 in tax credits to earn that extra little bit of income.

I really feel like I wasted my time working that late-night self-employment side job in the end, because I made much less than my hourly rate after factoring in the loss of the child tax credit. In researching how to lower my AGI after the end of 2015 has already past, I discovered I could contribute 25% of that self-employment income into my Rollover IRA as a SEP-IRA contribution. Sadly it isn't enough to get back any of the child tax credit I lost.

Really, in the end, I can blame reaching the phase-out on that last bit of income from any income source. Should I blame my CD interest that earned that last bit of income? Should I blame that tiny bit of self-employment income? Maybe that Chase bank bonus for opening a new account? Yeah... that wasn't worth it. :|
Not meant to go off-topic, but this is compelling proof of the inherent flaws in the tax code.

rkhusky
Posts: 7831
Joined: Thu Aug 18, 2011 8:09 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by rkhusky » Mon Feb 08, 2016 1:22 pm

You don't lose all the child tax credit at once, it's $50 for every $1000 in income over $110K, i.e. an additional 5% tax on average.

Elemental
Posts: 154
Joined: Fri Feb 06, 2009 5:08 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Elemental » Mon Feb 08, 2016 1:43 pm

rkhusky wrote:You don't lose all the child tax credit at once, it's $50 for every $1000 in income over $110K, i.e. an additional 5% tax on average.
To OP's point: If you earned $1000 you would lose $50. If you earned $1001, would you lose $100 (lose $50 for earning that $1)?

Just to clarify, the $110k is for married filing jointly. For married filing separately, it begins to phase out at $55k. For others, it begins to phase out at $75k.

rkhusky
Posts: 7831
Joined: Thu Aug 18, 2011 8:09 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by rkhusky » Mon Feb 08, 2016 2:02 pm

Elemental wrote:
rkhusky wrote:You don't lose all the child tax credit at once, it's $50 for every $1000 in income over $110K, i.e. an additional 5% tax on average.
To OP's point: If you earned $1000 you would lose $50. If you earned $1001, would you lose $100 (lose $50 for earning that $1)?
Yes.

gvsucavie03
Posts: 1408
Joined: Sat Feb 16, 2013 8:30 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by gvsucavie03 » Mon Feb 08, 2016 2:10 pm

Louverture wrote:A married couple going from $36,500 to $36,501 (AGI) could cost them a $600 tax credit--possibly $1,200 if they can both get the credit which seems to be the case (Saver's Credit).
This is incorrect. They only lose the portion that phases out, not the whole credit. The credit phases out at $62,001 for MFJ. Going from $62,000 to $62,001 could lose up to $400. My wife and I were at $62,676 and I couldn't justify spending $676 to get $200 (she doesn't have retirement at work).

User avatar
N1CKV
Posts: 810
Joined: Wed Mar 21, 2012 8:18 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by N1CKV » Mon Feb 08, 2016 2:16 pm

CFM300 wrote:
SpringMan wrote:...if one is only a small amount into the higher tax bracket AFTER converting, the higher bracket applies only to the small amount over.
But increasing your tax bracket also increases your short-term capital gains tax rate, since the two are the same. Also, sliding into the 25% tax bracket increases your long-term capital gains tax rate from 0% to 15%.
It only applies to the amount over. I ran in to this on my return this go round.
I was strategically trying to stay in the 15% bracket with enough headroom to take a Tax Gain Harvest at 0% LTCG, however I was off my mark just a bit and the last $79 of that LTCG was hit with 15% tax.

Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Johno » Mon Feb 08, 2016 5:17 pm

My federal taxes in recent years are subject to a phenomenon where $1 more in income (or $1 less in deductions) can *reduce* taxes by ~$3k. I couldn't tell you in simple tax law terms what it is. It's some interaction among the AMT, foreign tax credit (mine is fairly large) and total of regular deductions. Just below this 'hole' my all-in* federal marginal (on ordinary income) reaches ~26.5%. Then at one point $1 more in income or $1 less in deductions reduces the total tax by ~$3k. Then the marginal rate on additional $'s from there jumps to ~33.4%. This is still below the Net Investment Tax (3.8%) threshold. In 2013 I was able to land in this 'hole' by not claiming some valid deductions. In 2014 it was still there but had shifted upward to where I couldn't reach it. I don't know if it's affected by the permanent AMT 'patch', we'll soon see.

*not theoretical bracket rate, but how many $'s in extra tax when I add a given increment to income, according to Turbotax, also including adjusting the deduction for state tax on the extra income. The federal regular tax, AMT add on, allowed deductions and FTC all change at varying rates.

User avatar
llama
Posts: 104
Joined: Wed Dec 23, 2015 1:41 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by llama » Tue Feb 09, 2016 2:23 am

From doing my taxes this year, it appears the Tuition and Fees deduction has cliffs where the deduction first steps down from $4000 to $2000, and then later from $2000 to $0.

gvsucavie03
Posts: 1408
Joined: Sat Feb 16, 2013 8:30 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by gvsucavie03 » Tue Feb 09, 2016 6:22 am

llama wrote:From doing my taxes this year, it appears the Tuition and Fees deduction has cliffs where the deduction first steps down from $4000 to $2000, and then later from $2000 to $0.
Depending on the bracket and whether or not it's graduated, that's a pretty steep cliff. 4000-2000 in the 25% bracket is $500 :shock:

mkc
Posts: 68
Joined: Wed Apr 17, 2013 2:59 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by mkc » Tue Feb 09, 2016 9:16 am

Tennessee's Hall Tax (income tax on interest and dividends and fund cap gains distributions), specifically for those 65 and older.

If over 65, single $33K, joint $59K, using all sources of income, including SS are exempt from the tax. If you are over that at all, you pay 6% on interest, dividends, etc.

User avatar
llama
Posts: 104
Joined: Wed Dec 23, 2015 1:41 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by llama » Tue Feb 09, 2016 4:30 pm

gvsucavie03 wrote:
llama wrote:From doing my taxes this year, it appears the Tuition and Fees deduction has cliffs where the deduction first steps down from $4000 to $2000, and then later from $2000 to $0.
Depending on the bracket and whether or not it's graduated, that's a pretty steep cliff. 4000-2000 in the 25% bracket is $500 :shock:
Yes, my reading of IRS Pub. 970 is that, for example, if you're married filing jointly and in the 25% bracket, then earning $1 over $130,000 will cost you $500.

gvsucavie03
Posts: 1408
Joined: Sat Feb 16, 2013 8:30 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by gvsucavie03 » Tue Feb 09, 2016 4:54 pm

llama wrote:
gvsucavie03 wrote:
llama wrote:From doing my taxes this year, it appears the Tuition and Fees deduction has cliffs where the deduction first steps down from $4000 to $2000, and then later from $2000 to $0.
Depending on the bracket and whether or not it's graduated, that's a pretty steep cliff. 4000-2000 in the 25% bracket is $500 :shock:
Yes, my reading of IRS Pub. 970 is that, for example, if you're married filing jointly and in the 25% bracket, then earning $1 over $130,000 will cost you $500.
Should have punched out 5 minutes sooner on Dec 31 :oops:

randomguy
Posts: 8514
Joined: Wed Sep 17, 2014 9:00 am

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by randomguy » Tue Feb 09, 2016 6:28 pm

Johno wrote:My federal taxes in recent years are subject to a phenomenon where $1 more in income (or $1 less in deductions) can *reduce* taxes by ~$3k. I couldn't tell you in simple tax law terms what it is. It's some interaction among the AMT, foreign tax credit (mine is fairly large) and total of regular deductions. Just below this 'hole' my all-in* federal marginal (on ordinary income) reaches ~26.5%. Then at one point $1 more in income or $1 less in deductions reduces the total tax by ~$3k. Then the marginal rate on additional $'s from there jumps to ~33.4%. This is still below the Net Investment Tax (3.8%) threshold. In 2013 I was able to land in this 'hole' by not claiming some valid deductions. In 2014 it was still there but had shifted upward to where I couldn't reach it. I don't know if it's affected by the permanent AMT 'patch', we'll soon see.

*not theoretical bracket rate, but how many $'s in extra tax when I add a given increment to income, according to Turbotax, also including adjusting the deduction for state tax on the extra income. The federal regular tax, AMT add on, allowed deductions and FTC all change at varying rates.
I would be curious to know exactly why this happens since you always have to pay the max of AMT or normal taxes. I know there are various restrictions on the foreign tax credit when paying AMT but I don't think any of them should give you a cliff.

Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by Johno » Wed Feb 10, 2016 9:24 am

randomguy wrote:
Johno wrote:My federal taxes in recent years are subject to a phenomenon where $1 more in income (or $1 less in deductions) can *reduce* taxes by ~$3k. I couldn't tell you in simple tax law terms what it is. It's some interaction among the AMT, foreign tax credit (mine is fairly large) and total of regular deductions.
I would be curious to know exactly why this happens since you always have to pay the max of AMT or normal taxes. I know there are various restrictions on the foreign tax credit when paying AMT but I don't think any of them should give you a cliff.
When I say AMT I mean the amount that shows up on the AMT line of the 1040, which is the excess (if any) of the total AMT over the regular. But anyway at a point, where there's already substantial AMT excess, all the components in tax section of 1040 shift and the total *drops* around $3k, for one *more* $ of ord income or $1 less of deductions. Why in general is too many competing/conflicting goals and methods piled up over time in the tax code, and it melts down at this particular point. If it were more common I suppose they'd have 'patched' it somehow but I doubt I'm the only one subject to it. It's not necessarily noticeable unless you do a thorough test of your marginal rate over a wide range of income, which is how I found it, and as I said some years it's possible to reach the 'hole' by not claiming certain deductions, other years it's out of reach. Others who could benefit from it probably just haven't noticed it. I haven't found it that interesting to try to delve into why in terms of which greater/less than, subtract this, etc. sets it off or which addition of other 'fix' to the code over time planted it, but it's definitely there.

nominalBob
Posts: 107
Joined: Fri Nov 28, 2014 5:30 pm

Re: Please share examples where earning an extra $1 can cost more in taxes than income.

Post by nominalBob » Thu Feb 11, 2016 6:19 am

llama wrote:From doing my taxes this year, it appears the Tuition and Fees deduction has cliffs where the deduction first steps down from $4000 to $2000, and then later from $2000 to $0.
Similarly, Lifetime Learning Credit, and Hope Scholarship Credit have cliffs, but with a more dramatic effect.

Post Reply