I’ve heard this many times, even from my beautiful mother! This is not true! Let’s bring up my SAMPLE tax table as a refresher:
$0-$10,000 = 0% Tax Rate
$10,000-$20,000 = 10% Tax Rate
$20,000-$50,000 = 20% Tax Rate
$50,000-$75,000 = 30% Tax Rate
$75,000+ = 50% Tax Rate
You will hear some people complain that they don’t want their next raise because it will move them into a higher tax bracket and reduce their takehome pay and they will have less money to spend. Okay, the Government does some interesting things but they’ve figured this one out a long time ago. Here’s how it works: Let’s take someone earning $49,000. Their marginal tax rate is 20% in our example tax system. That DOES NOT MEAN they pay 20% x $49,000 in tax. They pay 0% on their first $10,000, 10% tax on the next $10,000, and 20% on the next $29,000. Let’s work that out:
(0% x $10,000) + (10% x $10,000) + (20% x $29,000) = $6,800 in tax
$49,000 Income – $6,800 tax = $42,200 TAKE HOME
So let’s say they get their raise to $50,001. The myth is that now instead of paying 20% on all their income, they pay 30% – which would reduce their take home pay by roughly $5,000! This could not be further from the truth! Let’s do the real math:
(0% x $10,000) + (10% x $10,000) + (20% x $30,000) + (30% x $1) = $7,000.30 in Tax
$50,0001 Income – $7,000.30 Tax = $43,000.70 TAKE HOME
Last time I checked, $43,000.70 is greater than $42,200! So feel free to ask for that next raise… :)
Thanks to everyone who has been submitting (and re-submitting) this post to your favourite social media websites like Reddit and Stumbleupon – much appreciated!
Excellent post! No matter how many times I explain the concept of marginal tax rates, people just don’t get it. I guess I have to show them next time
Well, I would disagree. My wife was recently promoted and received a $5000 raise. Her take home prior to the raise was 1380 every two weeks. Now, after the raise, it is 1118. To me, this seems like less rather than more. She asked compensation and they replied that it was due to her being bumped.
Chris – let’s break it down. A take home pay of $1380 every two weeks (assuming no other deductions like an office coffee contribution, group benefits payment, etc) means your wife was making approximately $42,750 (using Ontario as an example). A $5,000 raise to $47,750 would give her an after tax take home pay of approximately $1510 every two weeks.
Look it up yourself: http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2010-Personal-Tax
(you’ll need to do some calculations on your own, but it’s not rocket science)
I would re-ask compensation to explain, and if they give you the same answer ask for a detailed comparison and by all means cut and paste my response and send it to them. There is definitely something else going on there…
Yes i agree and it is peoples’ lack of understanding of the tax system that can hold them back. I’d be happy with a raise!
You fail to factor in things like the Medical Services Plan (British Columbians), which can bring down your income by increasing the cost paid out for health care. I can see your argument for taxes alone, but sometimes a raise isn’t actually a raise when everything else is considered.
Preet,
Thx for the post. However, as others have implied, aren’t there other factors to consider? I haven’t thought about all scenarios but what about investments for example. Let’s say someone had lot of cash (eg $100-200k)in non-rsp and non-tfsa investments (interest, cap gains, div). Wouldn’t being at a higher marginal tax rate increase the tax rate of the investments too? So if someone got a raise that barely put them in the next tax bracket, it would seem to me that they would have less overall income than before. Is my logic correct?
Hello,
Just wondering why when we do our taxes we enter our taxable income into only 1 income bracket column?
That certainly makes it seem as though a 1 dollar raise could potentially cost you big time. What am I missing here?
Eric