Wednesday, March 4, 2009

Common Income Tax Misconceptions

Have you ever heard a co-worker or someone you know say something about not wanting to change jobs or get a promotion because it will move them up in the tax bracket or that all their money will just go to taxes? They are inferring that they will actually lose money because they will be taxed more than they will gain from the raise. I have heard this many times. I think there is a common misconception out there that people think all of their income is taxed at the same rate based on how much they make. However, we learned this is not true from the reading and in class. The marginal tax rate concept shows that only the additional dollars you make in the next tax bracket are taxed at a higher rate, not your entire salary. In essence, it is still a good idea to take a raise or promotion and make more money because you will still get to keep some of that money. I found an article in the NY Times that illustrates this point nicely. In addition, there is a great article on the basics of income taxes and the main points you need to know if you do your own taxes.

Also, for those of you who are wondering about President Obama's new tax proposals which would increase taxes on wealthy Americans, I found another article that explains this pretty well. Gotta love the NY Times! A few interesting points: The new highest tax bracket would be taxed at 39.6% instead of the current 35%. There will be also be some interesting affects for wealthy people who make a living off hedge funds, as the current capital gains tax is 15% but the plan proposes to increase it to 39.6% which would be the same rate as the income tax. For college students and low income people, there will be some new tax breaks. The article also goes through a fairly extensive AMT explanation for wealthy tax payers, so if anyone is confused about that, check it out.


  1. Ashley, this is terrific. I am sure to use the example when I teach the same topic next time.

  2. Even among major news organizations and high earners who really should know better, there seems to be confusion as to what "marginal tax rate" really means.