Tax Fact: The Misconception of Being “Pushed Into a Higher Tax Bracket”
The IRS tax system is progressive, which means that as the amount of taxable income increases the tax rate increases. However, the increased rate of tax is only on the additional income. For example, in 2013 the three lowest tax rates for a single taxpayer are:
10% on the first $8,925
15% on any income over $8,925 but not more than $36,250
25% on any income over $36,250 but not more than $87,850
These three tax rates determine how much tax someone pays on their first $87,850 of income. Whether you make $1,000,000/year or $87,850/year, your tax on the first $87,850 is exactly the same. This is where the pop culture misconception is illustrated. You will hear people saying that they are going to lose money if they make any more because it will push them into a higher tax bracket. This is never the case. Possibly the additional income will be taxed at a higher rate, but it will not have any effect on the earnings they already have earned. Based on the above rates if someone earns $8,925 they owe $892.50 ($8,925 x 10%) in tax. If they were to earn $10 they would owe $892.50 plus $1.50 (15% x $10) = $894. Nevertheless, the common misconception is that by earning the additional $10 the taxpayer would now owe $1,340.25 ($8,935 total income x 15% rate). As you can see from the example, the additional income is the only one that gets the higher rate, the original income is not affected by the additional income having a higher tax rate.
Many people have a fear of the IRS and taxes as it is, it does not need to be compounded by having bad information.