# Better to make \$999,999 to avoid the higher tax rate if made over one million dollars?

That's the question. Some people tell me that if Obama (for an example) imposes say 40% tax rate on people making 1,000,000 dollars, people would just make less than 1,000,000 dollars and still keep the 28% rate. But I think how it works is that 40% is effective only on the amount you make over 1,000,000 dollars and it doesn't apply to the first 999,999 dollars? Right? In other words, if you make 1,100,000, the first 999,999 is taxed at 28% rate and the 100,001 is taxed at 40%?

You are correct. The tax rate being discussed, is the marginal tax rate. Of course, people do try to avoid taxes, and they will try harder to avoid higher taxes. Taxes can also change incentives for those not trying to avoid the tax, though in the case you mention, many economists think that incentives aren't much affected by the U.S. current marginal tax rates, which are lower than most Western countries.

• thank you! much appreciated. I didn't know it's called marginal tax... I've seen that term often but now that's what it was. :)
– netrox
Apr 25 '12 at 4:05

Taxable income over \$388,350 has a marginal 35% rate. Those in that bracket would be happy to pay 28%. But yes, it's marginal, each rate applying to the next \$X until the next rate kicks in.

It seems foolish to me to avoid earning money just because you'll have to pay some of it as tax. 28%, 35% or 40% - either way you're going to keep 60% or more for yourself. So why give it up? To avoid paying the tax?

The additional tax rate bracket is what it its: bracket. Meaning only the money within that bracket will be taxed at that rate.

• I have deleted my previous comment but edited your post to delete an irrelevant reference to the current US President. Federal income tax is paid to the US Government, not the President. But the point of my deleted comment was that the marginal income tax rate is not the whole answer and an increase of \$1 in AGI can have profound effect on other financial matters as well. For example, a \$1 change in MAGI can trigger an increase of more than \$68 per month per person in Medicare IRRMA premiums for a couple on Medicare without changing their Schedule A deductions (because of 7.5% floor). May 6 '12 at 2:37
• @DilipSarwate which again isn't really relevant to the OP, he is asking about income tax, not Medicare. In general, I'm not disagreeing with you that higher gross income may in some cases result in lower net income, but for the question asked it is not relevant. May 6 '12 at 4:08

Actually, it depends on your location. Here in Maryland, they have passed a bill where the new tax rate is to be applied to all the income of anyone earning over \$500,000, so yes, if that were to pass, you would be better off.

• Yes, I don't know what a more appropriate word is... Regressively? Uniformly? In CT they DID do that last year (retroactive, in the time sense) and really screwed over a lot of people. May 7 '12 at 0:14
• @DJClayworth Has your edit changed the meaning of the answer? If the new tax rate of, say, 10% applies to all the income of anyone earning over \$500,000, then such a person owes \$50,000+ in tax. If the new tax rate applies to all the income over \$500,00 as the OP had it, and the tax rate below that is 8%, then the taxpayer owes \$40,000 + 10% of the excess over \$500,000, a \$10K difference. May 7 '12 at 22:08
• @DilipSarwate Yes it did. The OP mistakenly said "retroactively" when they meant "over all the income" (that's what the article says). May 8 '12 at 0:05
• @DJClayworth You are right, the new tax rate is not a marginal rate since it applies to all the income of high earners, not just the excess above \$500,000. The bill has not actually passed; just approved by the Senate, and I suspect it will be shot down in the House or vetoed by the Governor. I am deleting my original comment about retroactive since it makes no sense any more. May 8 '12 at 0:56
• @AaronD.Marasco There's no harm in deleting a comment if it is no longer applicable. May 8 '12 at 12:50