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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.

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  • 2
    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. Sep 23 at 4:02
  • 16
    Obligatory visual explanation for how marginal taxes work: reddit.com/r/coolguides/comments/e1w58y/marginal_tax
    – Alexander
    Sep 23 at 14:15
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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 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. Sep 23 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 at 17:56
68

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.

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  • 2
    You might take into account the standard deduction as well. Sep 23 at 3:58
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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. Sep 23 at 4:03
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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 at 11:53
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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. Sep 23 at 14:40
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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 at 18:22
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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.

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  • FICA taxes come out first, then what is left is taxable at the federal level.
    – rtaft
    Sep 23 at 12:56
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    @rtaft That's incorrect, FICA does not reduce AGI and is not deductible.
    – Hart CO
    Sep 23 at 14:22
  • What reduces AGI? My W-2 always shows the taxable earnings as 5-10% less than salary.
    – rtaft
    Sep 23 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: humanresources.umn.edu/pay-and-taxes/…
    – Hart CO
    Sep 23 at 15:31
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    @rtaft Health Insurance is the other common area that is pre-tax
    – Andy C
    Sep 24 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
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