Updated: Nov 2, 2019
Probably the most common myth about finance is about the income tax bracket system
The common myth that you want to, "make just enough money so that you don't go into a higher tax bracket or you might end up making less money" is simply not true! And don't feel bad if you thought this originally because it is truly the most misunderstood topic we've come to hear. We've heard this from everybody including 9-5 new hires all the way up to CEO's! So let's explain how it really works.
Income taxes follow what is called a marginal tax rate, where you get taxed in clumps. Instead of having to pay your whole salary at the highest rate (which is what most people think) you actually pay taxes in groups. This is kinda hard to understand without an example so let's give you one:
Let's say the tax brackets are:
SALARY $0 - $30,000 = TAX RATE 10%
SALARY $30,001 - $50,000 = TAX RATE 20%
THE MYTH: You make $40,000/year which puts you in the 20% tax bracket. Meaning you owe $8,000. This is wrong!!!
THE TRUTH: You make $40,000/year. The first $30,000 will be taxed at 10% and the remainder, $10,000 ($40,000-$30,000), will get taxed at the 20% rate. Meaning you owe $5,000! This is true!!!
We like to stress this because we have seen people make legitimate life decisions based on this. Some people worry that taking a promotion will mean making less money but there is only more to offer when you do. If you think about it, not only will you make more money, you will open yourself up to more learning opportunities, more experience in a higher role, the ability to transfer at a higher level to another location, the ability to move even further up a ladder, the push in spirit for you to achieve more; the list goes on and on.
We have to note that there are some things that could change with higher income though, like you may lose certain tax credits or government aid if you do but the reward and opportunity should be growing in your favor. Naturally you can see that the efficiency of what you take home will be decreased but you'll still be making more money at the end of the day. You'll just have to keep this in mind when you're deciding how to spend your time and naturally you'll find that making money from other sources will be a stronger alternative at the highest tiers.
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