Question

1) Will getting a small raise that bumps you into a higher tax bracket make you take home less money after taxes? Explain.

Answer 1

Thats absolutely not true. Many people think that when their income increases by just enough to push them Into a higher tax bracket, their overall take home pay will decrease. This assumption is totally incorrect. Because the United States has a marginal tax rate system, when an increase in income pushes you into a higher tax bracket, you only pay the higher tax rate on the portion of your income that exceeds the income threshold for the next-highest tax bracket.
This concept can be understand with an example.
For the tax year 2014, single taxpayers are subject to the following federal income tax
schedule:
Rate Income
10% $0 to $9,075
15% $9,076 to $36,900
25% $36,901 to $39,350
28% $89,351 to $186,350
33% $186,351 to $405,100
35% $405,101 to 406,750
39.6% $406,751+
Suppose you get a raise and your annual salary increases from $35,000 to $39,000. Many people incorrectly think that whereas they previously paid a tax of 15% of $35,000, or $5,250, leaving them with $29,750 In take-home pay, after their salary increase and tax bracket change, they will pay a tax of 25% on $39,000.

But this is not true they only have to pay a tax of 25% on the part of income which is above $36,900. it means in above example 25% tax will be applicable to only $2100(39,000 - 36,900).so we can conclude that getting a small raise that bumps you intoa higher tax bracket will not make you home less money after taxes because of marginal tax rate system.