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Why you never don’t want more income
You may have heard someone talk—or even thought yourself—about turning down additional income for fear of being taxed in a higher bracket.
But is this a valid concern?
The top federal marginal tax rate (MTR)—the rate at which your last dollar of taxable income is taxed—is currently 37%. (Note: You wouldn’t hit this marginal tax rate until your taxable income exceeded $539,900 as a single filer, or $647,850 married filing jointly for federal.)
The top state MTR is California’s 12.3%. (Note: This rate only applies to income above $625,370 as a single filer, or $1,250,739 married filing jointly. Moreover, most states' top MTRs are well below that, with some states having no income tax at all.)
Assume you’re a single filer with $625,370 of taxable income. At that amount of income, you’re also paying Medicare and additional Medicare tax, totaling 2.35%.
Let’s round all to 50% as your worst case total marginal tax rate.
You already know that your effective tax rate (ETR) will be lower.
But for now let’s focus on making just one extra dollar of income.
Whether you would continue doing whatever work you do to earn that dollar, knowing you’d keep about half after taxes, is up to you.
But at that level of income, you’re probably implementing some financial planning strategies to convert those earned dollars into tax-advantaged investments, build up passive income streams, and contribute to some income deferment strategies.
So the additional income, in excess of what’s needed to support your daily life, is accelerating your progress toward reducing or eliminating your reliance on your day job.
Keeping 50% of what you’ve earned after taxes seems like a bummer. But it’s still more to put toward those strategies and goals.
And for most of us, the worst case marginal tax rate on each additional dollar of income would be less, closer to 35–40% in a high tax state.
For those of us in a position to seriously consider or enjoy additional income from a raise at work or running a successful business, at least two things are true:
- We will keep the majority of what we earn, even in a high tax state, but especially in low or no tax states.
- Income deferment strategies, such as investing in a retirement plan, will have a more dramatic effect on your tax bill at this range of income, if you can afford to set the cash aside.
So, in general, you never don’t want more income. You’ll almost always keep most of it.
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