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Tax Brackets Misconceptions- Should I earn more money?
There is a misconception out there about tax tables, and how your income is taxed. Let’s make some assumptions about the tax rate for each income bracket (data is for tax year 2011)-
Up to $8,500 taxed at 10%
$8,501 to $34,500 taxed at 15%
$34,501 to $83,600 taxed at 25%
$83,601 to $174,400 taxed at 28%
If you earn $100,000 would you think that you pay $28,000 in taxes? Nope. You pay 10% up to $8,500. You pay 15% on the income between $8,500 and $34,500 or $3,900. You pay 25% on the income between $34,500 and $83,600 or $16,375. And you pay 28% on the income over $83,600, and in our example, $4,592. Your total tax is $25,717 or about 25.72% as an effective tax rate excluding personal exemptions, mortgage interest, and other tax deductions.
So, by going $1 over $83,600, you do not lump all your income into the 28% bracket. In fact, if you earned exactly $83,601 you would pay $17,025 in taxes or about 20%.
The moral of the story is-Don’t stop earning just because of the next tax bracket.