You’re super excited about the raise, until you get home and realize that next year you’ll be in a higher tax bracket.
In this situation, some (including our reader) may ask themselves … with all the extra taxes you’ll be paying, will you actually end up with a smaller paycheck than before your new raise? Let’s find out!
First, I’ll give you the answer, then we’ll discuss why. The answer is… [drumroll please] no! You won’t end up with less take-home pay as a result of entering into a new tax bracket.
Let’s go through an example to understand why.
Let’s say before the raise your annual income was $50,000. Assuming you only take the standard deduction ($12,000) your taxable income will be $38,000. Now, after the raise, your new income is $55,000 and taxable income is $43,000.
Tax before raise ($38,000 taxable income):
Tax after raise ($43,000 taxable income):
As you can see, your raise actually results in a higher take-home pay ($37,600) than before ($33,630)! The money you previously made is still being charged at the same tax rate and only the new/additional money is being charged at a higher rate.
So next time you get a raise, celebrate! Going up to a new tax bracket is nothing to worry about.
Note: For this example, we’ve only factored in federal income tax. The answer is the same for state income tax, which uses tax brackets as well. The answer is also the same for Social Security and Medicare tax, which charge a flat 6.2% and 1.45% of taxable income respectively. I’ve also rounded to the nearest dollar for simplicity.