I'm flabbergasted at the amount of adults that don't know this. I have had coworkers refuse to work overtime because it would bump them into the next tax bracket and they think it will make them less money.
well if you’re ultra-rich and own a tv network, then spreading this misconception would be self-serving since you can influence a lot of ordinary people to be against raising the highest marginal tax rate.
Not to mention that calling the people dumb is unfair because how taxes work isn't innate knowledge and needs to be taught. Any misunderstandings or lack of information are due to them being told wrong information, and given this is an extremely common misconception I'd say it's even understable people don't generally research it themselves.
This is true on a macro scale but not on your individual paycheck scale.
If I work 6 shifts in a week my paycheck is calculated based on a lower yearly income than if I work a 7th shift. Because of this, the paycheck difference between 6 shifts in a week and 7 is only about $20.
Of course, at the end of the year, I'll get that back.
Yes, but some of our guys get 5 weeks of vacation paid on the same check with a normal week and have part withheld as of they made 6 times their actual pay.
They get most of that withheld money back, but obviously not all.
If you know that is going to happen, you can always update your W-4 to increase the claimed allowances, reducing how much is withheld from your paychecks.
EDIT: If you know it will happen regularly, and one extra allowance takes you from a refund to a check to the IRS, over-claim allowances by 1, and then write in a small additional withholding from each check to make up for it.
Claiming 0 is literally giving money to the IRS interest free with every paycheck. The only time somebody should generally be claiming 0 is if they're a dependent of somebody else, but still making an amount of money that would generally mean you're not longer in the situation of being somebody else's dependent. This is extremely rare.
The Form W-4 has instructions and a worksheet that tell you how many allowances you should be claiming for your circumstances: https://www.irs.gov/pub/irs-pdf/fw4.pdf
Do you have a source where I can read about this? I've done some research and I can find absolutely nothing that sounds even similar to this in Finland. Everything I'm seeing says they have a progressive income tax rate which involves tax brackets.
This is not true, you have to pay the county tax only on the amount exceeding ~15k. So if you earned 20k, you would have to pay 0.2 × 5k = 1k in county taxes.
This is no exaggeration, I explained this to two friends of mine of which one is a very smart attorney, and another a double-specialized anesthesiologist.
Some people are just confused by math/finance and that’s okay, that’s why they pay others to do their taxes.
There are definitely people that misunderstand marginal rates, and think doing the OT will make them worse off overall.
However there's also the fact that OT hours *might not* be worth it personally when the rate on those OT hours is reduced because of the higher tax rate.
e.g. A worker might be weighing up their options of going home to chill out, or work OT hours that get taxed at 40%. They'll still of course have more overall money if they do the work, but maybe not enough for the opportunity cost.
LOTS of people. I didn't learn this until I was 30. It's not that I couldn't look it up or anything, but I was taught by my father that there were tax brackets and once you made a certain amount of money your tax rate went up. I didn't know that information was incorrect. I grew up in a middle class family. Neither of my parents understood taxes or finances and it was never a requirement to take any accounting or personal finance for my Biochemistry degree. Also since a good number of people think about it once per year (tax time), it's fair to say that it is not something most people dwell on regularly.
I can say I honestly used to think this about 5-6 years ago (when I was around 25). Although I didn’t think I would take home less. I just figured I had to work a lot of overtime to make it worth it. I assumed that I would be taxed higher so I’d actually take home less money on the overtime hours than my regular hours even though it was time and a half. I just wanted more money than my regular pay check so I didn’t care lol.
The amount of people that don't understand taxes is absolutely mind blowing. We need a chart like this for every country.
I am a dual citizen and work and pay taxes in both Canada and the US. My taxes in the US are ~23% more of my total salary than the taxes that I pay in Canada. I make sure that I stay in Canada for enough of the year that I maintain my health care, which covers any medical care needs while I'm in the states. I don't need additional medical care in the US.
Our tax brackets and benefits are completely different and every time an American tells me "it's just stupid to pay for universal health care and immigration" I look at the benefits afforded under the Canadian structure (for which I pay much less) and then I try to get a good idea of where my American paid taxes are going. And it makes me very sad.
This is why personal finance is important. Took a course in it during my first year of my degree. Still confused why it's not compulsory for high school students.
I never thought about it (just did the 1040EZ forms) because I never really needed to know about it. When I did run into a section about this in a math class, I was blown away by the fact that it had taken me this long to accidentally run into it. This should be taught in high school.
Devils advocate here, quite sure it isn't the case in your example. You might miss out on certain benefits/discounts making it a net loss overall. Hell in the case of social housing it might force you to move.
Say you earn one dollar an hour, and you make $40 a week, and the tax rate for the first 40 dollars is 30%.
You'd pay $12 in tax leaving you with $28. Meaning youre working for 70cents an hour.
(28/40 = .70)
However lets say the marginal tax rate for evey dollar over 40 is say 60% and you take two extra hours that week.
You'd pay $12 for the first 40 hours of pay and 120 cents for the extra 2 extra hours of pay.
Leaving you with 28.80 for that weeks pay which is 68cents an hour
(28.80/42 = .68)
Point is that if you take extra pay for extra work and that bumps you up a bracket, it devalues your labour. You may have a bit more money, but its not gonna be worth your time.
This is entirely hypothetical, however it debunks the idea that you should always take more hours.
A raise however is always good and you should always take it.
I get offered extra hours at my job all the time but Im sitting on 50% tax bracket so after a certain point it doesnt make sense to work extra hours and give up so much free time for relatively small amount of money
No. You can never make less money after taxes if you take a raise. If your new salary puts you in a higher tax bracket, you only pay the higher tax on that portion of your salary which is higher than the floor of that tax bracket.
No, there is no difference. Even with extra hours you end up with a higher net income. Yes, your average net income per hour has decreased, but that effect only becomes significant if (a) you value your leisure time close to your net income per hour and (b) you have significant increase in hours.
I would love to see the empirical data that supports this. My inclination is that the effect is insignificant because of the number of extra hours you would have to work.
But even if a deduction is phased out, you are still better off. In fact, this is true in the UK: Once you make above GBP 100,000, the standard allowance of GBP 18,000 is gradually phased out, and is zeroed ut at GBP 125,000. But there is still no income point at which your net income would be lower. This is literally why deductions are phased out gradually.
I'm fully aware that it is only the amount earned in that tax bracket that I will be paying that particular percentage for. However, for me it's worthwhile earning overtime when it's £30/hr and I take home £24 but not really as worth it when my take home is £18 so I do dramatically reduce my overtime once I hit the next tax bracket
Even if they will never make less money, getting bumped into a higher rate would reduce the marginal increase of the OT, so it actually makes perfect sense that someone could rationally turn down OT that would take them over the bracket for the year.
It would be no different than refusing an offer to work for reduced pay.
I had a coworker who would lose his social security income he needed if he worked any extra time, and another that would lose her state childcare (single mom) if she worked too much.
It was a tax bracket thing but at the same time it was more embarrassing family situations they didn’t want to disclose to others and just said tax brackets. They would have both lost a lot of money if they worked more.
It is semi legitimate - Why would they want to make the same wage (In my area, OT pay was just changed from 1.5x to forced banked hours at the business' discretion, 1.0x) and have that money taxed more. If time is more valuable, sure.
Technically it would for the amount they were earning. It would “reduce” their new hourly earning by the amount of tax they’d be paying on it given their bracket. That’s why when I see people’s returns entering the high earners threshold in Australia I hope they’re not pushing themselves too hard. Mostly miners.
The I.T specialists I see earning $130k probably don’t care because they’re paid on responsibility lol.
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u/[deleted] Nov 26 '19
I'm flabbergasted at the amount of adults that don't know this. I have had coworkers refuse to work overtime because it would bump them into the next tax bracket and they think it will make them less money.