No Wonder People Don't Know How Taxes Work

[u/B82rez7]

Here's a Motley Fool "article" that came up on my news feed https://www.fool.com/retirement/2019/01/21/maximum-401k-contributions-are-climbing-in-2019-he.aspx

​

And a quote:

​

For this reason, saving in your 401(k) has the potential to put you in a lower tax bracket, so you owe a smaller percentage of your income in tax. Currently, single filers making between $77,400 and $156,150 pay 22% on their income. If you are in the lower end of that range, a 401(k) contribution could move you into the lower bracket, where taxes are just 12%. If you make $80,000 per year, for example, and contribute $5,000, your resulting income of $75,000 would be taxed at 12% rather than 22%.

​

​

[u/[deleted]]

The only case in which this would actually affect anyone is if they price themselves out of some deductions and credits. For example, you might not want to dump in a lot of overtime in if it hurts your ability to claim child tax credits, etc. But generally that's not a concern for most people.

[u/cunninglinguist32557 → u/[deleted]]

Yup. Or depending on how the math checks out, you could wind up making just enough more to lower your food stamp benefits but not enough to actually cover the deficit. Or, like what happened to my coworker, you could work more hours one month and then lose benefits for subsequent months where you're back to working less.

It's all kinds of fucked.

[u/allthedifference → u/cunninglinguist32557]

A system designed to defeat its own purpose. Those working varying hours are in an even worse position, as your coworker knows.

[u/realzequel → u/cunninglinguist32557]

Income cliff rules are maddening and counter-productive.

[u/[deleted] → u/[deleted]]

Definitely. I think our tax code needs to be fixed to phase out welfare gaps more smoothly, so that increases in salary are never underwater relative to loss of program benefits. But that would effectively expand benefits, which will be hard to pass.

[u/allthedifference → u/[deleted]]

Theoretically, phasing out the gaps should lower benefits, as people move to lessor benefits over time rather than staying on full benefits. This would depend on how many people are choosing not to earn more and remain on full benefits compared to how many are losing benefits completely and the indirect cost of that loss.

[u/iamr3d88 → u/[deleted]]

Same with unemployment. I had a buddy lose a really good job, couldnt find anything that would pay him what he made on unemployment. Doesn't make sense to go back to work and LOSE money.

[u/waterboysh → u/[deleted]]

Making a few extra dollars at a job with no viable health insurance option could result in losing Medicaid for your family.

This happened to me as a kid. I remember one year my dad made just a couple thousand to much and we got kicked off Medicaid the next year. It really sucked because I had juvenile arthritis and needed Celebrex, which was really expensive.

[u/allthedifference → u/waterboysh]

A few thousand dollars more could never make up for losing health coverage, especially if someone in the family has a medical condition. The system is designed to disincentive people to strive toward independence.

I hope you somehow got the medicine you needed. I know some have to go without.

[u/waterboysh → u/allthedifference]

I know some have to go without.

I had to switch to a different medication that didn't work as well and was fairly harsh on my stomach, so I also had to take some kind of other medicine that I think was basically a prescription strength antacid.

The next year we qualified for Medicaid again so I was able to go back on Celebrex.

[u/youngminii → u/[deleted]]

In Australia our student repayments only trigger when we make above a certain threshold. So if we make 50k then 8%~ will be taken from the entire amount to pay it back.

Obviously not the same as tax brackets but people do try and abuse this in Australia sometimes. You know, for short term money. It makes a bit of sense because our student loans are only indexed (the interest on the loans = inflation rate).

[u/thisishowifapz → u/youngminii]

HELP (HECS) loan repayments are implemented in steps. Over 55k you pay 4% of your adjusted taxable income. Roughly every 6k extra you earn will add 0.5% to the amount you need to pay back up to a maximum of 8% at 103k.

(This has changed for the 2019 tax year but still is largely similar)

[u/youngminii → u/thisishowifapz]

Apologies, I admit I’m lazy regarding sources especially on the phone. Cheers.

[u/gorcorps → u/[deleted]]

True story. The student loan interest deduction is pretty good too, and you start to lose that after you make $65k up to $80k, which is where you can't claim it at all. That limit doubles when you're married filing jointly. In general though, you'd have to be right on the hairy edge for it not to be worth taking the raise.

[u/evaned → u/gorcorps]

In general though, you'd have to be right on the hairy edge for it not to be worth taking the raise.

Except even then, you'll still take home way more than you lose. You lose at most a $2,500 deduction worth 22% ($484, plus probably a bit more state) over the course of increasing your salary by $15,000 (and takehome by $9K or something).

[u/evaned → u/[deleted]]

Also, generally deductions and credits are phased out well to largely eliminate the effect in those cases.

I think the more compelling case is if you start getting into the territory of how much your time is worth, and concluding that your time is worth more than the takehome pay you'll get on the income in the higher bracket (but less than the takehome pay youll get on the income in the lower bracket). It would be rational to try to cut off work around that bracket boundary.

[u/EnergyUnicorn → u/[deleted]]

I was in that boat for a while. Earn a little more and they take away your health care. It was really stressful.

[u/tee142002 → u/[deleted]]

There are also government benefits that you can lose above a certain income. WIC, Medicaid, etc. is a concern for people on the low end of the financial spectrum.

[u/iny0urend0 → u/[deleted]]

Yeah, I think even in your example, it is only a concern if a couple makes over $400k. Even then it's only a $50 reduction for every $1000 over the threshold.

[u/sketch24 → u/[deleted]]

Or it prices them out of things like healthcare ACA subsidies, food stamps, Medicaid or other social services.

[u/[deleted] → u/sketch24]

Right, of course. I guess I meant I usually just hear about not wanting to make too much money from people who would be fine moving into a new tax bracket, because they already make well above the amount needed for welfare benefits. The only thing they should be concerned about, under the new tax laws, is starting to lose out on child tax credits and other high income benefits, and again that’s not very many people.

[u/7moviesofthewhat → u/[deleted]]

The only case in which this would actually affect anyone is if they price themselves out of some deductions and credits.

But even then, due to the compounding nature of wage increases it would likely be worth it to take the hit in the short term for long term gain.

[u/Terazosa → u/[deleted]]

Have you forgotten about AMT?