Tax Bracket Myth: Why Making $1 More Doesn't Cost You Thousands

A coworker once turned down a $3,000 raise. His reasoning: "It would push me into the next tax bracket, and I'd actually lose money." I pulled up a tax calculator and showed him the math. That raise would put an extra $2,340 in his pocket after taxes, not cost him money. He stared at the screen, confused. "But everyone says..." Yeah. Everyone's wrong. Here's how marginal tax rates actually work.

The Fundamental Misunderstanding

Most people think tax brackets work like this (WRONG):

How Marginal Tax Rates Actually Work

The U.S. uses a progressive tax system. Your income is taxed in chunks, with each chunk taxed at its bracket rate.

2025 Federal Tax Brackets (Single Filer):

Income Range	Tax Rate	What Gets Taxed
$0 - $11,600	10%	First $11,600
$11,601 - $47,150	12%	Next $35,550
$47,151 - $100,525	22%	Next $53,375
$100,526 - $191,950	24%	Next $91,425
$191,951 - $243,725	32%	Next $51,775
$243,726 - $609,350	35%	Next $365,625
$609,351+	37%	Everything above $609,350

Real Example: $75,000 Income

Let's calculate the actual tax for someone making $75,000 (single filer, taking standard deduction):

The $1 More Scenario

Now let's see what happens if they make $100,526—crossing into the 24% bracket:

The $3,000 Raise Breakdown

Back to my coworker. He made $98,000. The raise would take him to $101,000.

Scenario	Gross Income	Taxable Income	Federal Tax	Take-Home*
Before Raise	$98,000	$83,400	$16,760	$66,000
After Raise	$101,000	$86,400	$17,420	$68,340
Difference	+$3,000	+$3,000	+$660	+$2,340

*Simplified calculation for illustration. Actual take-home also includes state tax, FICA, etc.

He pays $660 more in taxes, but takes home $2,340 more. Not "loses money."

Where the Confusion Comes From

Three reasons people get this wrong:

1. Terminology Is Misleading:

Saying "I'm in the 24% tax bracket" makes it sound like you pay 24% on everything. You don't. You pay an effective rate that's much lower (often 12-18% even if your marginal rate is 24%).

2. Paycheck Withholding Confusion:

Sometimes a raise DOES result in a smaller paycheck temporarily. Why?

• Bonus lump sums get withheld at 22% flat rate (often MORE than your actual tax)
• HR might over-adjust withholding when updating payroll
• You cross a FICA or state tax threshold (different system)

But withholding ≠ actual tax owed. You get a refund at tax time if too much was withheld.

3. Benefits Cliffs (The Real Problem):

There ARE situations where earning more costs you money—but it's not federal tax brackets. It's means-tested benefits.

Effective vs Marginal Tax Rate

Two numbers that mean very different things:

Marginal Tax Rate:

The rate on your next dollar earned. If you're in the 24% bracket, your marginal rate is 24%.

Effective Tax Rate:

Total tax ÷ total income. Your average rate across all dollars.

State Taxes Complicate Things

Federal taxes are progressive. But state taxes vary wildly:

State Type	Examples	How It Works
No Income Tax	TX, FL, WA, NV	$0 state income tax
Flat Tax	IL, CO, MI	Same % for all income (e.g. 4.95%)
Progressive (low)	AZ, ND, PA	3-5% top rates
Progressive (high)	CA, NY, NJ	10-13% top rates

Total tax burden = Federal + State + FICA (7.65%) + Local

In California, a high earner might pay:

• Federal marginal: 37%
• State marginal: 13.3%
• FICA (on first $168k): 7.65%
• Combined marginal rate: ~58%

But even then, making an extra dollar never results in less take-home. You just keep less of it (~$0.42 instead of $0.63).

When Turning Down Money Makes Sense (Rarely)

There ARE strategic reasons to limit income, but they're not about tax brackets:

1. Preserve Benefit Eligibility:

If you're $1,000 under the ACA subsidy cliff and a bonus would cost you $7,000/year in premiums, defer the bonus to next year.

2. Roth IRA Contribution Limits:

2025 Roth IRA phase-out starts at $146,000 (single). If you're at $145k and a $5k bonus would eliminate your ability to contribute $7k to Roth IRA, consider deferring to 401(k) pre-tax instead.

3. Student Loan Forgiveness (IDR Plans):

If you're on income-driven repayment aiming for forgiveness in 5 years, keeping income lower reduces required payments. But only if you're confident in forgiveness.

Notice: NONE of these are about tax brackets themselves.

The "Write It Off" Scam

Related myth: "Buy a $40k truck and write it off! It's free money!"

No. Deductions reduce taxable income, not taxes dollar-for-dollar.

Deductions are valuable when you were going to spend the money anyway (legitimate business expense). Not as a way to "save money" by spending more.

Final Thoughts

The tax bracket myth persists because:

• The terminology is confusing ("I'm in the 24% bracket" implies I pay 24% on everything)
• Math is hard, and marginal systems require understanding progressive calculation
• People conflate withholding with actual tax owed
• Benefit cliffs ARE real, and get mixed up with tax bracket fears

Key takeaways:

• ✅ Always accept raises/bonuses in terms of federal income tax
• ✅ Your marginal rate ≠ your effective rate
• ✅ Only income ABOVE thresholds gets taxed at higher rates
• ✅ Making $1 more never costs you thousands in federal tax
• ⚠️ DO watch for benefits cliffs (ACA, SNAP, Medicaid)
• ⚠️ Deductions reduce taxable income, not taxes 1-for-1

My coworker? He took the raise. Got $2,340 more per year. Used it to max out his Roth IRA. Now he understands marginal tax rates and explains them to other people who are confused.

Don't leave money on the table because of a math myth.