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Until recently, I didn't know much about our tax code. I had heard the term 'progressive taxation' before, but never really equated it to anything beyond political banter. To go along with this, I forever believed the rumor that's been floating around since I got my first job a good decade ago that you might not want to take a promotion in your job, if it puts you into a higher tax bracket.
Like all of the sudden if my net income increased, I would instantly have to pay an amount in taxes that would completely offset the raise. Or worse, be a higher amount and make the raise not worth it all! Anyone else ever hear this? Has it scared anyone else from considering a raise??
Hope not. Cause come to find out this is simply not true. Tax Brackets don't work that way. They are progressive, meaning you pay a different % of tax on different (higher) levels of income. The tax 'progresses', in brackets, hence the name.
So, for example, if you make $35,000 and you get a raise that puts you making $37,500, part of your income will be taxed at a higher %. But only that amount that goes above and beyond the 2nd tier of the tax bracket. Assuming in this example you are single (it changes depending upon filing status, but all status examples would be equally progressive) then up to $9075 would be taxed at 10% regardless. Then the amount between $9076 and $36,900 would be taxed at 15%. And ONLY the remaining amount between $36,901 and $37,500 would be taxed at the higher 25% rate.
People might trick you into thinking that all of the sudden your entire income will be taxed at 25%, but this is thankfully not true. So, don't ever be afraid of taking a raise or a better job with better income just because of a fear in going up in tax brackets.