Tax brackets

I was working on my taxes yesterday when it reminded me of a conversation with my roommate when I was back in law school. He said his mother was angry because she had learned that she had earned just a few dollars over the limit that put her into a higher tax bracket. She thought that meant she actually lost money by earning those last few dollars.

I’m amazed at how many people make this mistake. You don’t lose money on your taxes by making more except in very rare cases where you may no longer qualify for some special benefit. The brackets are all marginal, not absolute. That means the new rate applies only to the dollars over the cutoff point, not to the X dollars below that. If you move from the 30% bracket to the 32% bracket when you earn that last $100, you get to keep $68 of that $100. The dollars just before that are still taxed at 30% and the ones below that at lower levels or not at all. You still make money by making money.

I thought this might make someone’s day.

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