Monday, September 5, 2011

Critical Thinking - Question, Question, Question

An article in the USA Weekend told of the importance for adults to understand math.  It included some good tips, but the last one addressing the relative value of a benefit increase (non-taxable) compared to a pay raise gave some very misleading information.  It said about a pay raise:  “The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise.”

Here is the error (using Married Filing Jointly examples for simplicity).  Tax brackets are marginal, meaning they only apply to the amount of additional money you make not to the lower amount.  Above $16,750 tax tables go up in $50 income increments, but the corresponding taxes only go up by around 7-8 dollars, which is 15% of $50.  When the bracket changes, at $68,000, it begins to go up by 12-13 dollars, or 25% of $50.  But all the rest is still taxed at 15%.  There isn’t a big jump at the breakpoint.

This linked table also makes the point.  The first table, 2010 married fining jointly, shows 0-$16,750 taxed at 10% and the next line shows $1675, which is 10% of $16,750, plus the amount you made within the next bracket taxed at 15% and so on.  Except for a few rare and ridiculous situations like being at the very top of a bracket, say $67,990 per year and getting a $22 per year raise, it is virtually impossible to get a reasonable raise and end up with less after taxes.

Unfortunately, so few people really sit down and do their taxes, handing them off to a tax preparer or computer program, that it’s easy to understand how the author and editor of this piece missed the error.  That’s why we must continue to be vigilant, think for ourselves and ask for more details when blanket statements don’t seem to make sense.

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