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I have two offers in the US at the moment. One at 153k and one at 175k. Single filer.

annual gross fed tax retained % take-home income
$153,000 0.24 0.76 $116,280
$175,000 0.32 0.68 $119,000

While there is 22k difference "on paper", it seems like after federal tax (ignoring state/local), the difference is $2720 a year. Do personal deductions or other factors throw this off significantly? Aka, is my "ballpark" math correct or am I missing something?

P.S. I don't plan to contribute to tax-deferred accounts.

Fattie
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Ivan Ivanov
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    In addition to federal income tax, you will have to pay Social Security Tax and will likely have to pay some state and possibly local income tax. Unless your employer covers it 100%, you'll also be paying for health insurance. These really shouldn't be ignored. – Brian Borchers Sep 23 '21 at 04:02
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    Obligatory visual explanation for how marginal taxes work: https://www.reddit.com/r/coolguides/comments/e1w58y/marginal_tax/ – Alexander Sep 23 '21 at 14:15
  • dude you're using the word "gross" not in the usual way. gross is the WHOLE THING, ie your column "annual" – Fattie Sep 23 '21 at 15:56
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    @IvanIvanov, you have made an overwhelming mistake :) :) I have great news for you. You do NOT pay 32% on the whole thing, only on "the last bit". – Fattie Sep 23 '21 at 15:57
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    There are some good answers here, but as a meta-remark, the combination of an income this large and a misunderstanding of the tax system this massive indicates that it could be really profitable over a lifetime to invest a few dozen hours in focused reading on personal finance. – Kevin Arlin Sep 23 '21 at 17:36
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    A better example is probably $164,925 at a 24% tax rate and $164,926 at a 32% tax rate (based on the values in one of the answers), which would actually have you earning much less with the higher salary if your calculation is correct (but luckily, it is not correct). (I wanted to edit the title to better reflect OP's actual worry here, but that would be a lot easier if the higher gross income results in a lower take-home pay). – NotThatGuy Sep 23 '21 at 17:56
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    Highly related: Should I negotiate a lower salary to be placed in a lower tax bracket?, Better to make $999,999 to avoid the higher tax rate if made over one million dollars?, Could a sizeable charitable contribution bump me into a lower income tax bracket? and How does the US federal income tax system work? – NotThatGuy Sep 23 '21 at 18:03
  • Note (as Fattie corrected) - Gross = amount before deductions/taxes/etc.; net = amount you actually get at the end after things are removed. – Joe Sep 23 '21 at 18:07
  • @Polygorial I don't think anyone would forget that they also spend money on a whole bunch of other things (and any fixed post-tax expense won't affect which one gives you more actual money to spend, or not spend, on things), but it's worth noting that some of those things are pre-tax (like medical and retirement), which can save you quite a bit in tax payments, with little to no downside given the right circumstances. Although the problem is still that this just isn't how tax is calculated. – NotThatGuy Sep 26 '21 at 00:18
  • In addition to Federal income tax, you should consider Federal payroll taxes (i.e., Social Security and Medicare) when comparing these offers. In particular, only the first $142,800 of gross income are subject to Social Security tax (in 2021), so that tax applies to a larger share of the income from the lesser offer. Just reduce both take-home pay estimates by $8,925 to account for Social Security tax. – Aaron Novstrup Sep 28 '21 at 20:07

3 Answers3

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In the US (and realistically every other country in the world that has graduated income tax brackets), the marginal rate applies only to income in that bracket, not all income. The intention of the tax code is not to penalize someone that makes an extra $1 in income by taxing every previous dollar they've made at a higher rate so they end up worse off after the raise.

Note that I'm going to assume for the purposes of these calculations that the amount you quote is your taxable income. Realistically, you'll take a deduction which will lower your taxable income. Most people would take the standard deduction of $12,000 but you might take more or less depending on your particular situation. That will lower both tax bills by the same dollar amount.

If we're looking at the 2021 income tax brackets for a single filer, you'd pay

  • 10% on the first $9,950 in income ($995)
  • 12% on the income between $9,951 and $40,525 ($3,669)
  • 22% on the income between $40,526 and $86,375 ($10,087)
  • 24% on income between $86,376 and $164,925
  • 32% on income between $164,926 and $209,425

Your $153k offer would net

153,000 - 995 - 3,669 - 10,087 - 0.24 * (153,000 - 86,375) = $122,259

Your $175k offer would net

175,000 - 995 - 3,669 - 10,087 - 18,852 - 0.32 * (175,000 - 164,925) = $138,173

So the net difference would be $15,914. Your marginal tax rate on roughly half of the additional income is 24% with the other half taxed at 32% so the net difference is about 27.7% less than the gross difference.

costrom
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Justin Cave
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    You might take into account the standard deduction as well. – Brian Borchers Sep 23 '21 at 03:58
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    @BrianBorchers - Added that. I meant to add the disclaimer that I was intentionally ignoring that because the amount will depend on the taxpayer. – Justin Cave Sep 23 '21 at 04:03
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    In past an HR manager told me the company would not raise me more than X because I would then fall in the upper bracket and get taxed more overall, it was to protect me. The lie to junior employee. – Alex L Sep 23 '21 at 11:53
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    (+1) and realistically every other country in the world that has graduated income tax brackets I know at least one exception to this: the canton of Geneva in Switzerland. They get around the obvious problems with this approach by having very many small brackets but they really define the tax rate that way. And above a million or so, the effective tax rate is constant (which is not the case with a regular graduated income tax). – Relaxed Sep 23 '21 at 12:35
  • @Relaxed and if you have multiple separate incomes and add complex social security, it is not inconceivable you will fall on multiple laws and your effective tax rate will be higher. There was a case in Slovakia years ago when, given certain unfortunate combination and range of wages and self-employment, where the marginal tax rate was 1000% or something. There is also the famous case of Astrid Lindgren and her 102% tax. – Radovan Garabík Sep 23 '21 at 13:52
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    @AlexL I had a co-worker who was absolutely convinced of that. He would go out of his way to avoid pay increases, or, if that failed, to dump everything in excess of the next tax bracket into pre-tax accounts. I was just a dumb kid at the time, so his absolute conviction had me misunderstanding the tax code for quite some time. – Michael Richardson Sep 23 '21 at 14:40
  • @Relaxed , i have never lived in that Canton, but, might there be some confusion? (Could you be thinking about the "special deals" they have for foreigners, which is kind of flat??) as far as I know they just have normal, everyday, progressive bands: eg, random google: https://taxsummaries.pwc.com/switzerland/individual/taxes-on-personal-income – Fattie Sep 23 '21 at 16:01
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    @AlexL were you benefitting from EITC at this stage in your career? HR would know if you were getting an advance. There is a semi-infamous trap in the code around $20K-30K (a function of number of children and married/single status) where the loss of benefits means the marginal benefit of extra income is reduced. With just one benefit you're better with +1 dollar income, but stacked phasesouts of EITC, child tax credit, Medicaid, TANF, Section 8 and other benefits means for some low income people, it can be true that one more dollar can actually cost more than $1 to them. – user662852 Sep 23 '21 at 18:22
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    @user662852, that is one of the rare scenarios where earning more money can mean you actually bring less home. It would be unusual for an HR department to intervene on that basis though since they would have no way of knowing whether an employee is claiming the EITC or not. – Seth R Sep 23 '21 at 18:30
  • @SethR Ah, I see the law changed. Prior to 2011, there was a program by which an employer could include an advance EITC payment in payroll to the employee. In that case, HR would have known. – user662852 Sep 23 '21 at 18:40
  • @Fattie Per your own source: "The Geneva tax table is quite complex as it does not apply a tax bracket system. […] The table below therefore only provides a general overview." They just make it look like a regular bracket system because it's thoroughly counter-intuitive for anybody else. The actual table is here – Relaxed Sep 23 '21 at 19:37
  • You’ve got some commas in the wrong place – Tim Sep 23 '21 at 21:46
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    @user662852 I'm in Canada, we have something similar called CWB. I was not on it. – Alex L Sep 24 '21 at 12:52
  • It's a funny topic! I remember being, oh, 17 yrs old and hearing about tax rates ("20, 25, 40 ?!?!") and indeed I assumed it was just a flat percentage in each bracket, as does the OP here. I was very relived when I figured out how it works :) – Fattie Sep 26 '21 at 14:44
  • Might be worth accounting for Social Security taxes. Reducing net pay by $8,925 will change the ratio between the two offers (and the ratios between the net/gross for each offer). – Aaron Novstrup Sep 28 '21 at 20:16
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Two issues here. First you aren't taxed on your gross income, at the minimum you'd typically reduce your gross income by the standard deduction (12,550 for single, though doesn't apply if married filing single or if you're a nonresident alien/dual status alien barring certain exceptions). Search "taxable income vs gross income", or "adjustments to gross income" for some more info on what could affect your taxable income, but for a quick estimate the standard deduction is likely adequate.

Second, the highest tax rate does not apply to all your taxable income, just the amount of taxable income that falls into that tax bracket. So you wouldn't pay 24% or 32% on all of your taxable income, just a portion. You'll pay the lower rates on the other portions of your income. This 2021 tax bracket makes it easy as it calculates the total tax-owed for all prior brackets:

Single filers

Tax rate Taxable income bracket Tax owed
10% $0 to $9,950 10% of taxable income
12% $9,951 to $40,525 $995 plus 12% of the amount over $9,950
22% $40,526 to $86,375 $4,664 plus 22% of the amount over $40,525
24% $86,376 to $164,925 $14,751 plus 24% of the amount over $86,375
32% $164,926 to $209,425 $33,603 plus 32% of the amount over $164,925
35% $209,426 to $523,600 $47,843 plus 35% of the amount over $209,425
37% $523,601 or more $157,804.25 plus 37% of the amount over $523,000

Assuming you only take the standard deduction and no other adjustments, your taxable income would be either $153,000 - $12,550 = $140,450 or $175,000 - 12,550 = $162,450

Your top marginal rate would be 24% for either, so the difference in tax paid would just be 24% of the difference in taxable income between the two:

162,450 - 140,450 = 22,000 -- difference in taxable income
22,000 * .24 = 5,280 -- additional tax paid with higher salary
22,000 * .76 = 16,720 -- additional net income with higher salary

If the top marginal rates were in different brackets you could do the math for the 'tax-owed' column to compare or calculate how much of the difference in taxable income gets taxed at each rate.

Community
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Hart CO
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  • FICA taxes come out first, then what is left is taxable at the federal level. – rtaft Sep 23 '21 at 12:56
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    @rtaft That's incorrect, FICA does not reduce AGI and is not deductible. – Hart CO Sep 23 '21 at 14:22
  • What reduces AGI? My W-2 always shows the taxable earnings as 5-10% less than salary. – rtaft Sep 23 '21 at 14:38
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    @rtaft Retirement contributions can be pre-tax deductions, flexible spending account contributions, etc. This article has a good list/explanation: https://humanresources.umn.edu/pay-and-taxes/understanding-pay-statement – Hart CO Sep 23 '21 at 15:31
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    @rtaft Health Insurance is the other common area that is pre-tax – Andy C Sep 24 '21 at 18:19
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Just for fun, let's suppose your second offer was for $165K instead of $175K. Now, if tax brackets were flat percentages, your after tax would be:

$153,000 * .76 = $116,280
$165,000 * .68 = $112,200

So you wouldn't want to make more money; yikes!

If that's how tax brackets worked, anyone approaching a cutoff (which in this case is $164,926 in 2021), would be begging their bosses not to give them a raise. Fortunately, as well covered in the other answers, tax rates are marginal.

$22K is a pretty big difference, if both are in the same city. But when comparing different job offers, there are many financial considerations, such as:

  1. Location (cost of living)
  2. Salary
  3. Bonus
  4. Health Insurance total price (best case vs worst case of premiums plus MOOP)
  5. HSA options and employer provided funds
  6. 401k (or similar), and matching percentages
  7. Other financial perks

Perhaps equally as important are other differences, such as:

  1. Job description/ job satisfaction
  2. Commute, and Remote vs Onsite requirements
  3. Work/life balance
TTT
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