Many workers worry that earning more, through a raise or bonus, could push them into a higher tax bracket and actually reduce their take-home pay.
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However, that fear is based on a common misunderstanding of how the U.S. tax system works. Do higher earnings mean you’ll take home less because of taxes?
Here’s what you need to know about how tax brackets impact your take home pay.
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The Myth
Many people believe that earning more money, through a raise or bonus, could actually cause them to lose money after taxes. This widespread misconception stems from confusion about how tax brackets actually apply to income.
“Many people have a misconception or ‘fear’ of even jumping a tax bracket due to a misunderstanding of how progressive tax systems work,” said Nicolette Davicino, a certified financial planner and financial advisor at Armstrong, Fleming & Moore.
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Davicino explained, “Many people think that moving into a higher tax bracket means their entire income will be taxed at that higher rate, which would reduce their pay and mean they take home less pay. In reality, only the portion of income within the higher bracket will be taxed at the new rate.”
How U.S. Tax Brackets Really Work
The U.S. tax system uses marginal tax rates, which means only the income that falls within each bracket is taxed at that bracket’s rate. This ensures that earning more will never reduce the after-tax income.
“To the extent that their taxable income now exceeds $47,150 for 2025, the amount over $47,150 is taxed at the much higher 22% tax rate,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. “The rest of the taxpayer’s income remains taxed at the lower 10- and 12% tax rates.”
Luscombe added that bonuses are often subject to higher withholding, which can make the take-home seem smaller at first. But this doesn’t mean individuals are taxed more on all of their income, just on the portion above the bracket threshold.
What About Bonuses?
A raise or bonus can push a portion of a taxpayer’s income into a higher tax bracket, but only that portion is taxed at the new, higher rate. The remainder of their income continues to be taxed at lower rates, so their overall take-home pay still increases.
For example, Luscombe said a taxpayer with a modified adjusted gross income of $147,000 who receives a $5,000 bonus in 2025 would not move into a higher tax bracket. However, their total income could exceed eligibility for other tax credits like the Clean Vehicle Credit, which has a $150,000 cap for individuals.
He said that this could result in the loss of the $7,500 credit unless the taxpayer qualifies based on the prior year’s income, which the IRS allows under current rules.
A Raise Means More, Not Less
A simple example illustrates how marginal tax brackets work in practice. Even when part of a taxpayer’s income enters a higher bracket, their overall take-home pay still increases.
For example, Davicino said that if a taxpayer earning $85,000 receives a $10,000 raise, only a portion of that raise would be taxed at the higher 24% rate under the 2024 tax brackets.
The first $4,450 of the raise would be taxed at 22% (resulting in $979 in taxes), and the remaining $5,550 would be taxed at 24% ($1,332), for a total tax of $2,311. That means the taxpayer still takes home $7,689 more annually, or roughly $641 more per month.
Tax bracket thresholds may adjust slightly in 2025 due to inflation, but the principle remains the same: a raise always results in more take-home pay.
Smart Next Steps
A raise or bonus increases take-home pay, even after taxes. This is an opportunity for taxpayers to revisit their budget, boost savings, or allocate extra income toward long-term goals.
Nasha Knowles, a certified financial planner and a financial advisor with Equitable Advisors, recommended dividing a savings goal into short- and long-term priorities.
According to Knowles, half of a 10% savings target might go into an interest-bearing savings account or money market fund to build an emergency fund with at least six months of living expenses. The other half can be directed toward a general investment account, not retirement-specific, that can grow over time but still be accessible if needed.
Knowles said, “An emergency savings fund should be liquid and should cover most unforeseen expenses.”
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Sources:
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Nicolette Davicino, a certified financial planner and financial advisor at Armstrong, Fleming & Moore.
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Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting
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Nasha Knowles, a certified financial planner and a financial advisor with Equitable Advisors
This article originally appeared on GOBankingRates.com: Do Higher Earnings Mean You’ll Take Home Less Because of Taxes?
