Could You End Up with a Lower Net Income by Moving Up a Tax Bracket?

We all have heard the saying, “The only certain things in life are death and taxes”. I do not know anyone who looks forward to either of these things. Certainly, nobody ever loves the idea of giving a huge chunk of their income to the government. Because the US government follows a progressive tax structure, some people even dread the idea of making a slightly higher pre-tax income, fearing that, after moving up to the next highest tax bracket, the final post-tax income would come out to be less than what they would have earned had they stayed in the original tax bracket.

But rest assured! In this article, we are going to dispel this myth and give everyone the peace of mind that, such a scenario would never happen. All it takes is some good ol’ scripting and plotting to help visualize this concept.

The Myth

The misconception that one could end up with a lower net income by moving up a tax bracket stems from the simplification of the definition of the tax bracket. For a simple example, let us use the 2023 federal tax bracket for single filers, and pretend that we are in a state with no state income taxes like Texas. When we see a tax bracket table like this:

Let us first ignore the 37% tax bracket for over $578,125 of income for now, since we want to be more relevant to the other 99% of society and zoom in on the more likely income ranges. The people who misunderstand the tax bracket are probably thinking this:

With this train of thought:

• 24% of $182,100 = $43,704
• 32% of $182,101 = $58,272.32

The difference in moving up to the 32% tax bracket would be $58,272.32 – $43,704 = $14,568.32. Ouch. But is this really the correct math though?

The Reality

The above notion would be incorrect. Different tiers of income are taxed at different rates. If one makes $182,101, that just means that you pay a mixture of 5 different tax rates, one for each segment of your income:

• 10% of $11,000 = $1,100
• 12% of ($44,725 – $11,000) = $4,047
• 22% of ($95,375 – $44,725) = $11,143
• 24% of ($182,100 – $95,375) = $20,814
• 32% of ($182,101 – $182,100) = $0.32

So making $182,100 exactly would require you to pay taxes in the sum of the first 4 bullet points ($1,100 + $4,047 + $11,143 + $20,814 = $37,104), while making $182,101 would require you to pay the sum of all 5 bullet points ($1,100 + $4,047 + $11,143 + $20,814 + $0.32 = $37,104.32), which is only 32 cents more! That is certainly a reasonable amount of additional tax to pay for making a dollar more.

Therefore, the correct illustration would be to move the line segments down in the above plot to fit their starting points to connect to the previous line segments’ ending points. For laziness, we will cite another CNBC page that already gives us the exact pre-computed sum from previous tax brackets for each tier of income.

Thus, in reality, the relationship between raw income and taxed amount looks like this:

As we can see, there is no disadvantage at all in moving up to any tax bracket. Do not let the fear of taxes ever hold you back from pursuing the compensation that you are truly worth!