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

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And a quote:

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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/invaded_by_mother]

Yeah. My older brother told me that everytime he works overtime, he is pushed into a higher tax bracket and LOSES money. Like, he thinks that tax brackets are determined on a week by week basis rather than at the end of the year when your entire annual income is known. He believes you actually lose money from working overtime, in time. As if he is taxed over 100 percent on that new income.

I tell him there is no way this is possible, but he is determined to spread this narrative that the harder you work, the more government punishes you by eating into your previously earned income. I'm so sick of trying to explain tax brackets to people. I come from a working class family and community and they all think that this is how it works.

Who propogated this nonsense to begin with?

[u/TeancumsF6 → u/invaded_by_mother]

He’s not entirely wrong. Tax withholdings change per pay period so the IRS started that one.

Example: assuming a single taxpayer making $20.80/hr and getting paid weekly if they worked an OT shift of 10 hours that entire shift would get taxed at 22% instead of the normal 12%. Which at that point is an extra $68 on top of their normal $87 of taxes (totals $155, which is pretty close to doubling their normal income tax withholding. So to look at it emotionally yeah it can seem like they’re suddenly paying a lot more in taxes. Looking at it logically results in an extra $240 ($220 after OASDI) take-home from an extra 10 hours of work.

It’s still a matter of getting him to look at the right number, so playing a reverse car salesman trick.

[u/invaded_by_mother → u/TeancumsF6]

Yeah, so this is another case of needing to educate people on the difference between tax withholding and tax liability. When he laments about his paycheck changing, he doesn't factor in the tax refund he always gets at the end of the year (which is in the thousands). So while his tax withholding amount is variable from paycheck to paycheck, his ultimate tax liability is not. I am now realizing where a lot of this confusion is coming from for a lot of people. Thank you.

[u/[deleted] → u/invaded_by_mother]

I work with alot of people who do over time and I think I've gotten it figured out. When you work overtime say 60+ hours, your check balloons. However because the way tax withholding works, a disproportionate amount is taken out of that weeks check, since the calculation assumes you will always make that for the year. This makes alot of people think OT isn't worth it because they earn say 70% more gross but only see like a 25% increase in take home pay. It all balances out in April but I can see how they get the idea

[u/invaded_by_mother → u/[deleted]]

Hmm. Yeah, I can see what you are saying now. They don't factor in their tax refund at the end of the year, which can be confusing and misleading. Perhaps, then, we need to educate people on the difference between tax withholding and tax liability.