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Any accountants or tax attorneys here? A simple question

post #1 of 18
Thread Starter 

Because the upper echelon of incomes are taxed at a higher rate, what is the point where it is beneficial to earn a lower salary?  For example, if someone makes 100k but is taxed 30%, he will be better off than someone making 110k taxed at 50%.  What is the cutoff, where say the lowest income is 80k, where it would be better to choose the lower salary to avoid the higher tax rate and therefore lower overall take home salary?

 

Also, are bonuses taxed differently than incomes? 

 

I reside in San Francisco, CA.  Thanks!

post #2 of 18
I don't think you need a tax attorney for that...you need someone who paid attention in high school.

It's always better to earn more income. Tax rates are based on marginal dollars.

If the 50% tax rate kicks in at 100k and everything below 100k is 30%, then it means you pay 30% on the first 100k and then 50% on the next 10k.
Total taxes are 35k and leftover income is 75k.

If you only made $100k, then you would pay $30k in taxes and end up with only 70k in income after taxes.

75k is better than 70k

There are sometimes benefits for shifting income around so that it is taxed differently, but that is not the same as deciding between earning more and earning less. Also, bonuses are often taxed at your top marginal rate and since your regular pay is taxed at an average of the marginal rates based on your expected salary, it sometimes feels like bonuses are taxed more than salary...but really it's all one big pool of "taxable gross income" at the end of the year when you do taxes.
post #3 of 18
Quote:
Originally Posted by LooksGood View Post

Because the upper echelon of incomes are taxed at a higher rate, what is the point where it is beneficial to earn a lower salary?  For example, if someone makes 100k but is taxed 30%, he will be better off than someone making 110k taxed at 50%.  What is the cutoff, where say the lowest income is 80k, where it would be better to choose the lower salary to avoid the higher tax rate and therefore lower overall take home salary?

Also, are bonuses taxed differently than incomes? 

I reside in San Francisco, CA.  Thanks!

Quote:
Originally Posted by otc View Post

I don't think you need a tax attorney for that...you need someone who paid attention in high school.
It's always better to earn more income. Tax rates are based on marginal dollars.
If the 50% tax rate kicks in at 100k and everything below 100k is 30%, then it means you pay 30% on the first 100k and then 50% on the next 10k.
Total taxes are 35k and leftover income is 75k.
If you only made $100k, then you would pay $30k in taxes and end up with only 70k in income after taxes.
75k is better than 70k
There are sometimes benefits for shifting income around so that it is taxed differently, but that is not the same as deciding between earning more and earning less. Also, bonuses are often taxed at your top marginal rate and since your regular pay is taxed at an average of the marginal rates based on your expected salary, it sometimes feels like bonuses are taxed more than salary...but really it's all one big pool of "taxable gross income" at the end of the year when you do taxes.

It also depends on your deductions, whether you're married or not, other investments...
post #4 of 18
Thread Starter 
Quote:
Originally Posted by otc View Post

I don't think you need a tax attorney for that...you need someone who paid attention in high school.
It's always better to earn more income. Tax rates are based on marginal dollars.
If the 50% tax rate kicks in at 100k and everything below 100k is 30%, then it means you pay 30% on the first 100k and then 50% on the next 10k.
Total taxes are 35k and leftover income is 75k.
If you only made $100k, then you would pay $30k in taxes and end up with only 70k in income after taxes.
75k is better than 70k
There are sometimes benefits for shifting income around so that it is taxed differently, but that is not the same as deciding between earning more and earning less. Also, bonuses are often taxed at your top marginal rate and since your regular pay is taxed at an average of the marginal rates based on your expected salary, it sometimes feels like bonuses are taxed more than salary...but really it's all one big pool of "taxable gross income" at the end of the year when you do taxes.


haha ok thanks.  I will try and look more into this.  I thought people were just placed in tax brackets based on salary.

post #5 of 18
Quote:
Originally Posted by LooksGood View Post


haha ok thanks.  I will try and look more into this.  I thought people were just placed in tax brackets based on salary.

I'm guessing you haven't earned enough to start worrying about tax brackets yet then.
post #6 of 18
Thread Starter 
Quote:
Originally Posted by Texasmade View Post


I'm guessing you haven't earned enough to start worrying about tax brackets yet then.


What's the upper tax bracket?  I don't earn a lot relative to where I live but I definitely do on a national level.

post #7 of 18
Quote:
Originally Posted by dragon8 View Post

It also depends on your deductions, whether you're married or not, other investments...

Not really in this guy's case though.

He's asking a ceteris parabus question--is there a point where all other things being equal, a person would be better off earning less total money. For the most part, that answer is no.

There may be a couple of goofy sections where income based cutoffs happen (like with a roth IRA, except those limits are graduated)...but for the most part earning 10k more is going to be a better deal anything you lose by crossing one of those cutoffs.
post #8 of 18
Quote:
Originally Posted by dragon8 View Post

It also depends on your deductions, whether you're married or not, other investments...

Not really in this guy's case though.

He's asking a ceteris parabus question--is there a point where all other things being equal, a person would be better off earning less total money. For the most part, that answer is no.

There may be a couple of goofy sections where income based cutoffs happen (like with a roth IRA, except those limits are graduated)...but for the most part earning 10k more is going to be a better deal anything you lose by crossing one of those cutoffs.
post #9 of 18
Otc's reply is bang on. The only thing to add is the differences in income sources as they get taxed differently. It's the ever-present wage versus capital income dilemma. But that's something to worry about when one actually has enough means to generate multiple income streams.
post #10 of 18
Canada Revenue Agency has a table .. that makes it really easy to see how "Tax Brackets" work.

Every country .. with someone with have a brain in charge of finance will structure any sort of tax bracket system like this.
http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#provincial

"On the next" ...

For example:
Quote:
5.05% on the first $39,723 of taxable income, +
9.15% on the next $39,725, +
11.16% on the next $429,552, +
12.16 % on the amount over $509 000

You only pay the higher tax on the income above the previous bracket. If you paid the higher rate on your entire income .. whoever made that decision should be fired.
post #11 of 18
Don't forget that in the USA, FICA (7.65%) doe not apply to wages over $110k (not exact figure, but really close). So, if you can make $120k, the $10k above $110k will not be subject to FICA.

But, as others have pointed out, the source of income becomes really important to truly lowering your tax rate - As opposed to earning less.

*Subject to change, awaiting final fiscal cliff regulations...
post #12 of 18
Quote:
Originally Posted by kuslamb View Post

Don't forget that in the USA, FICA (7.65%) doe not apply to wages over $110k (not exact figure, but really close). So, if you can make $120k, the $10k above $110k will not be subject to FICA.

But, as others have pointed out, the source of income becomes really important to truly lowering your tax rate - As opposed to earning less.

*Subject to change, awaiting final fiscal cliff regulations...

6.2% cuts off at $110K, the 1.45% for medicare has no limit.
post #13 of 18
Quote:
Originally Posted by otc View Post

There may be a couple of goofy sections where income based cutoffs happen (like with a roth IRA, except those limits are graduated)...but for the most part earning 10k more is going to be a better deal anything you lose by crossing one of those cutoffs.

Not so goofy times--older folks who are still working and hit RMD from their 401k.
post #14 of 18
Quote:
Originally Posted by jreigen View Post

6.2% cuts off at $110K, the 1.45% for medicare has no limit.

And then Obamacare kicks in for singles who make over 200k.
3.8% for income (20% federal for LT cap gains and dividends + 3.8% for OC) = 23.8% effective federal rate
0.9% for salary >200k + 33% marginal income tax rate until 400k = 33.9% marginal rate

And an eye popping 39.6% + 0.9% = 40.5% for those making over 400k.
If you live in NYC, the take home is actually less than 50% (40.5% + ~10.5% state) = 49% tax home after taxes for income >500k

EDIT: As a small timer, I just care about losing a few bucks to the stupid AMT
post #15 of 18
Quote:
Originally Posted by otc View Post

I don't think you need a tax attorney for that...you need someone who paid attention in high school.

It's always better to earn more income. Tax rates are based on marginal dollars.

If the 50% tax rate kicks in at 100k and everything below 100k is 30%, then it means you pay 30% on the first 100k and then 50% on the next 10k.
Total taxes are 35k and leftover income is 75k.

If you only made $100k, then you would pay $30k in taxes and end up with only 70k in income after taxes.

75k is better than 70k

There are sometimes benefits for shifting income around so that it is taxed differently, but that is not the same as deciding between earning more and earning less. Also, bonuses are often taxed at your top marginal rate and since your regular pay is taxed at an average of the marginal rates based on your expected salary, it sometimes feels like bonuses are taxed more than salary...but really it's all one big pool of "taxable gross income" at the end of the year when you do taxes.

I think you are referring to payroll withholding rather than income tax.
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