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"Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 9:02 am
by coachd50
I often hear people complain about "moving to a higher tax bracket" In fact, one teacher friend recently stopped tutoring an hour a day after school because she said it put her in the higher tax bracket ???? -- EDIT -- Not talking about people discussing planning for it HERE, on this website.

Now, she isn't terribly financially literate, so I discount her statement and actions, but that phrase is used so often in society by those with less "sophisticated" investment strategy and knowledge than those here on the forum (usually, very little financial planning, little investment etc). Hell, most people don't understand the difference between withholding, tax liability etc.

Am I missing something? Wouldn't the vast majority of individuals WANT to be in higher tax brackets, given that it means higher income? Is it just a stupid phrase uttered by financially illiterate people?

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 9:11 am
by Tlmlb
Isn't it obvious? People think tax brackets operate like a cliff vs. stair steps.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 9:32 am
by rcmarshall
I have to think she imagines that the higher bracket rate will somehow retroactively cause her previously earned income to be taxes at even higher rates, i.e. not knowing the difference between marginal rates and effective tax rates.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 9:42 am
by JW-Retired
Tlmlb wrote:
Sun Apr 07, 2019 9:11 am
Isn't it obvious? People think tax brackets operate like a cliff vs. stair steps.
Yep. IMO, even more common is people don't know that Medicare premium brackets really do operate with nearly a $1k/year "cliff".

I didn't know that until it got me!
JW

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 9:43 am
by deltaneutral83
Tlmlb wrote:
Sun Apr 07, 2019 9:11 am
Isn't it obvious? People think tax brackets operate like a cliff vs. stair steps.
Income taxes yes. How that affects Medicare/ACA is indeed a cliff.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:00 am
by EnjoyIt
rcmarshall wrote:
Sun Apr 07, 2019 9:32 am
I have to think she imagines that the higher bracket rate will somehow retroactively cause her previously earned income to be taxes at even higher rates, i.e. not knowing the difference between marginal rates and effective tax rates.
This is the most common misconception regarding taxes people make. Almost everyone believes that if you are in the 24% tax bracket, all of your income is taxed at 24% and not just the small amount that got you into 24%

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:11 am
by coachd50
WOW...so the lack of financial literacy is really that prevalent?
I was worried I just was missing something.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:22 am
by stoptothink
EnjoyIt wrote:
Sun Apr 07, 2019 10:00 am
rcmarshall wrote:
Sun Apr 07, 2019 9:32 am
I have to think she imagines that the higher bracket rate will somehow retroactively cause her previously earned income to be taxes at even higher rates, i.e. not knowing the difference between marginal rates and effective tax rates.
This is the most common misconception regarding taxes people make. Almost everyone believes that if you are in the 24% tax bracket, all of your income is taxed at 24% and to just the small amount that got you into 24%
I think I've had this discussion with at least a dozen employees. One time, at an annual review, an employee actually tried tried to talk me out of giving her a pretty significant raise because of it.

An even crazier story. I have an employee who's husband is still in school. I gave her a raise and she said it would put them over the threshold for her husband getting "financial aid" so she actually asked to go down to part-time (but keep the wage increase). I asked her if she contributed to the 401k plan, and she had no idea what it even was. I explained how they could keep their AGI below the threshold by actually putting money in "savings"; she looked at me like I was speaking some alien language. She has now been working part-time for the last 1.5yrs.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:25 am
by Flora
Contributions to a 401k or IRA are added back into income for purposes of FAFSA.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:36 am
by MNGopher
I was listening to a very popular morning radio program (KQRS) here in Mpls/StP area go on for ten minutes about how all your income is taxed the same. :oops: Between 5 of them, none of them knew about marginal tax brackets. Even after listeners were texting in to correct them they still didn't understand.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:38 am
by Clever_Username
Yup. Despite being in the 32% marginal bracket (9.3% state), my effective federal tax for 2018 was 18.6% and state 6.5%.

But I don't know how someone would or should know how marginal brackets work until they are told. I recently gave an in-class exercise related to computing tax due based on marginal tax brackets. Some students who I know are incredibly intelligent, pay attention, and have had great-paying summer internships (along with working during the school year), didn't know how it worked either. I don't know when it would have been explained to them.

Then again, I think I learned how they worked when a friend of mine suggested I code up a tax liability function as practice back when I was in high school.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:44 am
by Nowizard
We love being in the highest tax bracket possible after considering ways to ethically lower taxes. It means, as you said, that we have income. One thing is that we have no ability to itemize our medical deductions when that is typically one of the highest deductions according to TurboTax averages for people with similar returns. Good health for people our ages does not pay during tax season, it seems.
Tim

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:49 am
by retire2022
coachd50 wrote:
Sun Apr 07, 2019 9:02 am
I often hear people complain about "moving to a higher tax bracket" In fact, one teacher friend recently stopped tutoring an hour a day after school because she said it put her in the higher tax bracket ???? -- EDIT -- Not talking about people discussing planning for it HERE, on this website.

Now, she isn't terribly financially literate, so I discount her statement and actions, but that phrase is used so often in society by those with less "sophisticated" investment strategy and knowledge than those here on the forum (usually, very little financial planning, little investment etc). Hell, most people don't understand the difference between withholding, tax liability etc.

Am I missing something? Wouldn't the vast majority of individuals WANT to be in higher tax brackets, given that it means higher income? Is it just a stupid phrase uttered by financially illiterate people?
Op show your friends this online tax bracket calculator

http://www.moneychimp.com/features/tax_brackets.htm

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:54 am
by stan1
How to make this actionable and not a rant? When you have the opportunity you can try to educate people. Some people you might not have that type of relationship with. Some people won't want to listen. I don't spend time working with those groups but with a few where I really care about them and they are open to help and learning I'll make an investment of my time.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:55 am
by stoptothink
Flora wrote:
Sun Apr 07, 2019 10:25 am
Contributions to a 401k or IRA are added back into income for purposes of FAFSA.
I guess that's what I get for not having ever filled out a FAFSA; I cash-flowed all of my own 11yrs of university education and my wife's undergrad. With a HHI already in the $25k/yr range for a young married couple, I'd love to see the FAFSA calculator which suggested that they'd receive more aid if they decreased it even further.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 10:55 am
by Revision17
Ugh... yeah I know people like this :oops: . One of them decided to give up an $8k bonus because they were worried about it pushing them into a higher tax bracket. Years later they learned the error of their ways... they can't get the bonus back though :oops: :oops:

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 11:02 am
by Ron Ronnerson
I find that many of my coworkers (I’m a teacher) have the misconception that their entire income is taxed at the higher bracket if they fall into the next bracket.

However, I think a bigger issue that many people don’t actually take enough time to evaluate is whether working extra hours is worth it for them. They just see that more income is good without considering the costs associated with it. Extra hours worked means having to pay more federal and state income tax, possibly having to pay FICA (or pension contributions), and the extra costs associated with working a second job such as additional commute and meals that are eaten outside the home which would otherwise be home-cooked. There could be other financial consequences such losing out on certain credits, deductions, and benefits. The increased income might actually push someone off financial cliffs that exist (Affordable Care Act isn’t the only one). When it’s all said and done, the net pay from the second job might be reduced by quite a lot.

Maybe even more importantly, it’s worth it to look at the potential effects on the quality of life that come with working more. There is less time to take care of oneself (eat properly and exercise) and that could lead to poorer health and decreased longevity. There is increased stress and exhaustion. There is less time to spend with family. Kids grow up quickly and less time with a spouse might mean the connection in a marriage is not as strong.

All of this for additional dollars, taxed at higher rates, that provide less and less utility than the dollars before them. Of course, if the additional job provides good compensation (pay, benefits, happiness, whatever), it may be worth doing. I’m just saying the decision should be looked at carefully. People often pay a bigger price than just a higher tax bracket for working more.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 11:10 am
by EnjoyIt
Ron Ronnerson wrote:
Sun Apr 07, 2019 11:02 am
I find that many of my coworkers (I’m a teacher) have the misconception that their entire income is taxed at the higher bracket if they fall into the next bracket.

However, I think a bigger issue that many people don’t actually take enough time to evaluate is whether working extra hours is worth it for them. They just see that more income is good without considering the costs associated with it. Extra hours worked means having to pay more federal and state income tax, possibly having to pay FICA (or pension contributions), and the extra costs associated with working a second job such as additional commute and meals that are eaten outside the home which would otherwise be home-cooked. There could be other financial consequences such losing out on certain credits, deductions, and benefits. The increased income might actually push someone off financial cliffs that exist (Affordable Care Act isn’t the only one). When it’s all said and done, the net pay from the second job might be reduced by quite a lot.

Maybe even more importantly, it’s worth it to look at the potential effects on the quality of life that come with working more. There is less time to take care of oneself (eat properly and exercise) and that could lead to poorer health and decreased longevity. There is increased stress and exhaustion. There is less time to spend with family. Kids grow up quickly and less time with a spouse might mean the connection in a marriage is not as strong.

All of this for additional dollars, taxed at higher rates, that provide less and less utility than the dollars before them. Of course, if the additional job provides good compensation (pay, benefits, happiness, whatever), it may be worth doing. I’m just saying the decision should be looked at carefully. People often pay a bigger price than just a higher tax bracket for working more.
On the same note: Recently, I semi-retired by going part time and cut my pay by 50% though my take home decreased by 25%. I removed the least profitable of my hours.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 11:24 am
by feehater
I know someone who took this a step further and tried to spread out the sporadic work he did have into as many pay periods as possible, because then the payroll systems took out less taxes per paycheck. I.e. better to make $500 this week and $500 in two weeks than make $1000 all at once. He was convinced this lowered the total amount of taxes he paid for the year.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 11:30 am
by Spirit Rider
@feehater is correct. If you really want to have fun, try explaining the interaction between income, tax brackets and withholding to hourly employees.

I can't begin to tell you how many hourly workers think the marginal change in their effective weekly paycheck due to overtime is what taxes they will pay based on that overtime. When the majority of the time, the total overtime for the year does not even cause them to change brackets.

An even bigger problem was one company I worked for that did not use the supplemental withholding rate for bonuses. The company was generous to hourly employees in that a substantial portion of bonuses were equal for every full-time employee and only a portion was related to salary. Now cue to the fact that HR was lazy and stupid and just added the bonus to the weekly paycheck and used the standard withholding tables. You can imagine their reaction when almost 50% of the bonus went to federal/state income tax withholding and FICA.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 11:40 am
by ThisTimeItsDifferent
https://www.kitces.com/blog/long-term-c ... in-0-rate/

Also, as Kitces mentions in the link, the tax bracket or marginal income tax rate does not ecessarily equal the final effective marginal rate.

Every extra dollar of marginal regular income can crowd out a dollar of Long Term Capital Gain from the 0% to the 15% rate, adding that 15 basis points to the tax bracket and increasing the final effective marginal rate.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 11:46 am
by arcticpineapplecorp.
coachd50 wrote:
Sun Apr 07, 2019 9:02 am
In fact, one teacher friend recently stopped tutoring an hour a day after school because she said it put her in the higher tax bracket ????
Not sure how involved you want to get here with your friend, but you could explain that sometimes it's possible to get more income but pay less tax. I do by deferring enough in my 457b plan to reduce my marginal tax bracket. Without deferring, I'd be in the 22% bracket but because I contribute to 457b, enough to push the rest of my income down in the 12% bracket. Every raise I get potentially pushes me back into the 22% but if I defer that I'm staying in the 12% bracket and investing for my future (while saving 22% tax on what I'm deferring into 457b). What's wrong with that?

So there are some ways to manage tax rates at times. But you do have to be willing to save/invest. What I've heard is 40% of Americans don't have $400 in savings.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 2:50 pm
by FoolMeOnce
Ask your teacher friend why she fears the next tax bracket.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 3:20 pm
by coachd50
FoolMeOnce wrote:
Sun Apr 07, 2019 2:50 pm
Ask your teacher friend why she fears the next tax bracket.
I truly believe it was just a way out of doing the extra hour (it was an after school program). But I definitely chalk it up to being financially illiterate. So many people apparently are. It is pretty sad.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 3:28 pm
by Figuring_it_out
I had this very discussion with my brother in law over Christmas. He turned down Christmas overtime because once he makes over a certain threshold "Uncle Sam gets it instead of him". :shock: :oops: I slowly sipped my eggnog and gave a comforting mmmmhhhhhmmmm... :beer

He was not interested in learning new things about finance I and was not interested in getting involved in his either.

Re: "Worried about being pushed into 'higher tax bracket' "

Posted: Sun Apr 07, 2019 4:37 pm
by LadyGeek
I removed an off-topic post. This thread has run its course and is locked (not personal nor actionable). General comment threads are off topic in the forums with "Personal" in the title. See: A reminder that non-investing general comment threads are OT
- It must be personal. In other words, you must be asking about your own situation. You can also ask on behalf of someone specific, such as a family member.

- It must be actionable. You must be able to do something specific with the replies that will make a difference in your situation.
If you have a specific question, please ask directly and provide sufficient information for members to supply appropriate advice.