Many people fear that winning a raise will catapult them into a higher tax bracket, and they'll wind up worse off than they were before. But this is a somewhat misguided notion about how the progressive federal income tax system used in the U.S. works. While those who receive salary increases are indeed taxed at higher rates, only the added income is vulnerable to the increased rates.
- The more you earn, the more taxes you pay—but the U.S. progressive federal income tax system lessens the bite somewhat.
- Since the system levies different tax rates on different portions of an individual's income, your entire income won't be subject to a higher tax bracket when you get a raise.
- Even if your pay raise has bumped you into a higher nominal tax bracket, your effective tax rate would only increase by a few percentage points.
How to Calculate How Much Tax You Owe
The more you earn, the more taxes you pay. But the progressively higher tax rate takes some of the sting out of pulling in more cash. The tax tables below show the rates the Internal Revenue Service (IRS) imposes on income for the tax year 2022 (which comes due in April 2023) and 2023 (which comes due in April 2024):
|Tax Brackets, 2022|
|2022 Rate||Married Filing Jointly||Single Filers||Head of Household||Married Filing Separately|
|10%||$20,550 or less||$10,275 or less||$14,650 or less||$10,275 or less|
|12%||$$20,551 to $83,550||$10,276 to $41,775||$14,651 to $55,900||$10,276 to $41,775|
|22%||$83,551 to $178,150||$41,776 to $89,075||$55,901 to $89,050||$41,776 to $89,075|
|24%||$178,151 to $340,100||$89,076 to $170,050||$89,051 to $170,050||$89,076 to $170,050|
|32%||$340,101 to $431,900||$170,051 to $215,950||$170,051 to $215,950||$170,051 to $219,950|
|35%||$431,901 to $647,850||$215,951 to $539,900||$215,951 to $539,900||$215,951 to $323,925|
|37%||Over $647,850||Over $539,900||Over $539,900||Over $323,925|
Your marginal tax rate is the rate of tax that applies to each additional dollar of income earned. If you're single and earned $39,475 that year, you are in the 12% marginal tax bracket. Your tax liability for 2022 was $1,027.5 (10% of $10,275) plus 12% of the amount of your earnings over $10,275—which is $29,200. So, you owe $1,027.5 plus 12% of $29,200, which is $3,504. Your total tax for 2022 is $4,531.5.
While your marginal tax rate was 12%, your effective tax rate, or the average rate of tax you paid on your total income, was lower. To calculate your effective tax rate, divide your total tax by your total income. In this case, $4,531.5/$39,475 gives you an effective tax rate of 11.48%.
Now, let's see what happens to your tax liability if you got a $10,000 raise that elevated your annual income for 2022 to $49,475. You already know that you owe $1,027.5 on the first $10,275 you earned. But now that your total income falls between $41,776 and $89,075, your $10,000 raise bumps you into the 22% tax bracket.
The amount between $41,775 and $10,276 ($31,499) is subject to a 12% tax, which comes out to $3,779.88, which is 12% of $31,499. The remainder, which is $49,475-$41,776 = $7,699, is subject to a tax of 22%, which comes out to $1,693.78. Your total tax bill comes out to $6,501.16 ($1,027.5 + $3,799.88 + $1,693.78).
To determine your overall tax rate for your $49,475 salary, simply divide your total tax ($6,501.16) by your total income ($49,475) to reveal an effective tax rate of 13.14%, not 22%.
Changes for Tax Year 2023
The tax tables are updated annually by the IRS. For the tax year 2023, the income ranges are adjusted as follows.
|Tax Brackets, 2023|
|2023 Rate||Married Filing Jointly||Single Filers||Head of Household||Married Filing Separately|
|10%||$22,000 or less||$11,000 or less||$15,700 or less||$11,000 or less|
|12%||$22,001 to $89,450||$11,001 to $44,725||$15,701 to $59,850||$11,001 to $44,725|
|22%||$89,451 to $190,750||$44,726 to $95,375||$59,851 to $95,350||$44,726 to $95,375|
|24%||$190,751 to $364,200||$95,376 to $182,100||$95,351 to $182,100||$95,376 to $182,100|
|32%||$364,201 to $462,500||$182,101 to $231,250||$182,101 to $231,250||$182,101 to $231,250|
|35%||$462,501 to $693,750||$231,251 to $578,125||$231,251 to $578,100||$231,251 to $346,875|
|37%||Over $693,750||Over $578,125||Over $578,100||Over $346,875|
Deductions and Credits
The aforementioned example doesn't account for the deductions and credits that may potentially reduce your taxable income. Every taxpayer can choose whether to take a standard deduction or itemize deductions.
Single individuals who don't own their own homes probably don't have many deductions to itemize, so a standard deduction makes more sense. In fact, most Americans now use the standard deduction since it nearly doubled in size in 2018.
Instead of paying tax on all $49,475 that you earn, you'll pay tax on that amount minus the standard deduction. For the tax year 2022, the standard deduction for single filers is $12,950, reducing your taxable income to $36,525. For the tax year 2023, the deduction for single filers rises to $13,850.
Does Getting a Raise Affect Taxes?
Yes, getting a raise affects taxes. The more money you earn, the more you will have to pay taxes on, increasing your tax bill. For example, if the income tax is 10% and you earn $5,000, your tax bill is $500. If you get a raise to $8,000, your tax bill is now $800. The U.S. income tax is progressive, so the more income you earn, the higher the rate you will pay in taxes as you move from one income tax bracket to a higher one. But only the additional income that falls in the higher tax bracket is subject to the higher tax.
Do Bigger Paychecks Get Taxed More?
It is possible that bigger paychecks get taxed more. As you earn more and more income, you move into a higher marginal tax bracket, as the U.S. income tax system is progressive. You will only be taxed on the additional income that falls into a higher tax bracket; not all of your income will be taxed in the higher tax bracket; however, this will still mean that your bigger paycheck is taxed more.
How Can I Avoid Owing Taxes?
There is no way to avoid owing taxes altogether; however, there are many ways to reduce your taxable income, meaning that you will pay less in taxes. For starters, you can take standard or itemized deductions, which lowers your taxable income. You can also contribute pre-tax to retirement programs, such as a 401(k), which will also lower your taxable income.
The Bottom Line
The progressive tax system is designed to levy different tax rates on different portions of an individual's income, imposing the higher rate only on income above a certain level. Your entire income won't be subject to a higher tax bracket, in other words. All in all, a raise is a cause for celebration and not a source of angst.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."
Internal Revenue Service. "Here’s a Quick Overview of Tax Reform Changes and Where Taxpayers Can Find More Info."