One of the most common money myths is that a raise can push you into a higher bracket and leave you with less take-home pay. It can't. U.S. federal income tax is progressive and marginal, which means each rate only applies to the slice of income that falls inside its band.
Marginal rate vs. effective rate
Your marginal rate is the rate on your last dollar of taxable income. Your effective rate is your total income tax divided by your income. Because the lower slices are taxed at lower rates, your effective rate is always below your top marginal rate.
A simple example
Imagine a made-up system with three bands: 10% on the first $20,000, 20% on the next $30,000 and 30% on anything above $50,000. Someone with $60,000 of taxable income pays:
- 10% of $20,000 = $2,000
- 20% of $30,000 = $6,000
- 30% of $10,000 = $3,000
- Total: $11,000, an effective rate of about 18.3%
If that person gets a $1,000 raise, only the extra $1,000 is taxed at 30%. They keep $700 of it. The rest of their income is taxed exactly as before.
Taxable income is not your salary
Brackets apply to taxable income: gross income minus adjustments (such as some retirement contributions) and either the standard deduction or your itemized deductions. That's why two people with the same salary can owe very different amounts.
What this means for your decisions
- Don't turn down a raise or extra hours because of bracket fears.
- Pre-tax contributions, such as a traditional 401(k), save tax at your marginal rate, which is often higher than your effective rate.
- Use your effective rate for budgeting and your marginal rate when comparing pre-tax and after-tax choices.
Where to find the current numbers
The IRS updates bracket thresholds and the standard deduction every year for inflation. Look up the current year's tables on IRS.gov before you plan, and check your state's rules separately, since state income tax works differently in each state.
Educational information only, not tax advice. Tax rules, brackets and contribution limits change every year, so confirm current figures at IRS.gov or with a qualified tax professional.