Your income is taxed in phases - not one tax bracket!
My old friend Dave texted me the other day talking about how he avoided being pushed into the next tax bracket by declining a $5k promotion...
What he didn't understand is that your income isn't taxed in one single tax bracket!
Your income is taxed in phases or groups.
The first part of your income is taxed at one rate, while the next parts of your income are taxed at different tax rates.
MANY people get confused by this and think a pay raise or a new job opportunity that pays more will push all of their income to be taxed at a higher rate...
But that isn't the case.
Let’s use the water in a cup analogy:
Your annual salary (water) is broken into several 16oz cups.
Your first 16oz of salary are poured into the first cup. The IRS only takes a one ounce sip from it.
The second 16oz of salary are poured into the next cup. The IRS takes two ounces from it.
The third 16oz of salary are poured into the next cup. The IRS takes three ounces from it.
Overall you are getting taxed 6 ounces for 48 ounces of salary, but the sips are by the cup.
Now you get a raise which will add a fourth cup.
The IRS will only drink deeper from the fourth cup. They will not go back to the other cups and drink from them.
I hope that clears up any confusion!
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #087
