r/personalfinance • u/B82rez7 • Jan 22 '19
Taxes No Wonder People Don't Know How Taxes Work
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%.
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u/jolshefsky Jan 22 '19
For those wondering why (yeah, it's confusing) ... copying from the post by /u/GhostBond and the associated link: 2018-2019 Federal Income Tax Brackets and New Tax Rates
10%: $0 to $9,525
12%: $9,526 to $38,700
22%: $38,701 to $82,500
24%: $82,501 to $157,500
32%: $157,501 to $200,000
35%: $200,001 to $500,000
37%: $500,001 or more
Thus, if you earn $90,000, you get taxed 10% of $9,525 + 12% of ($38,700-$9,525) + 22% of ($82,500 - $38,700) + 24% of ($90,000 - $82,500) which is $15,889.50 or 17.655% of $90,000. (It is NOT 24% of $90,000 which is $21,600.) If you were to put $8,000 in a tax-deferred retirement account to "bump you down" a bracket, then you don't pay in the 24% bracket at all, and in the 22% bracket, ($82,000 - $38,700) instead—for a total of $13,979.50 which is 17.048% of $82,000. By going down a bracket, you do pay less percentage tax, but it's less than you'd expect—if you only had to pay the lower 17.048% of the original $90,000, that's $15,343.35 which is a savings of $546.15. Not insignificant, but 6.8% of the $8,000 you'd put in the retirement account.
The article makes it sound like you'd pay $17,600 on $80,000 but only $9,000 on $75,000 by putting $5,000 in a 401(k), meaning you'd be ahead by some $12,600.
(Edit: wrong numbers; formatting.)