How a Raise Affects Your Take-Home Pay and Taxes
One of the most persistent tax myths is that getting a raise can move you into a higher tax bracket and actually cost you money. This is false. Understanding how marginal tax rates work will show you why a raise always increases your take-home pay.
The Marginal Tax Rate Myth
The US uses a progressive tax system with marginal tax brackets. Only the income within each bracket is taxed at that bracket's rate. Moving into a higher bracket does not cause all of your income to be taxed at the higher rate — just the portion above the threshold.
Example: $5,000 Raise
Say you earn $95,000 as a single filer and get a $5,000 raise to $100,000. The first $100,525 is in the 24% bracket or below. Your extra $5,000 is taxed at 22% (the bracket for income between $47,150 and $100,525), meaning you pay about $1,100 in additional federal tax and keep $3,900.
What Actually Changes With a Raise
- Your marginal tax rate may increase, but your effective (average) rate rises only slightly
- Your paycheck withholding increases proportionally
- You may lose eligibility for some income-phased credits or deductions
- Your Social Security and Medicare taxes (FICA) increase proportionally
What to Do After a Raise
- Review your W-4 to ensure proper withholding
- Consider increasing 401(k) contributions to reduce taxable income
- Check if your new income affects Roth IRA eligibility
- Evaluate whether you now benefit from itemizing vs. standard deduction
A raise always means more money in your pocket after taxes. Never turn down a raise out of fear of a higher tax bracket.
