[dylanks2]

Being in a higher tax bracket doesn't lead you to pay more tax on your initial income, only a higher rate on money above a certain threshold. That said, the article is right in that an S-Corp or LLC sound right and are rarely a good idea because you sometimes lose out on certain tax deductions because your personal income is too high. Remember though, a tax bracket is a sliding scale... see the margin tax rates table at https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...

[staunch]

YES! It's so annoying how few people understand this. People are never "in a tax bracket" -- only money is!

Your first $40k may be taxed at 10% and your next $20k may be taxed at 15% or whatever, but you are not "in a tax bracket".

The idea of being "in" a tax bracket gave rise to the dumb idea that making more money can net you less after taxes, which is virtually never the case.

[cmccabe]

Sorry, but it may be dumb, but it's true. Making more money can lead to less take-home pay. One really good example is if you hit the AMT (alternative minimum tax.) "Your money" is not in the AMT-- you are. And it often means that a raise can end up costing you money. There are also similar situations where getting a job can mean losing out on welfare, leading to you actually having less money to take home.

[vonmoltke]

Yes, the AMT is the one case where you could end up with less take-home. Its an exception to the normal functioning of the tax code, though, and it works by prohibiting most permissible deductions. Thus, while the statement about the AMT decreasing take-home with increased is factually correct, this does not happen through the bracket system. GP was clearly addressing the misconception that people move into tax brackets and must pay higher tax rates in all their income as a result.

Your welfare example has nothing to do with taxes. Welfare benefits are set by gross income level with some COL and other local adjustments. Your tax status is irrelevant.

[Nrsolis]

UGH.

People in the USA forget that we have TWO tax systems.

One is the regular tax system that everyone knows and loves to hate.

The other is the closest thing we have to a "flat tax" and it's called AMT. It has different rules and different rates.

When you do taxes, you compute your tax liability using BOTH systems and you pay the HIGHER amount. That's how it works.

I pay AMT and it sucks.

[cmccabe]

There are a ton of places in the tax code where making more money results in you keeping less of it. For example if you sell more than X dollars worth of goods on eBay, you have to start paying tax, which will cost you dear. So the jump from X to X+1 ends up costing you. I think X = $500, but maybe they changed it.

The IRS even reduces your taxes if you lose money in the stock market, if your business property depreciates, and so forth. I like to refer to those cases as "the government paying you to be a loser." Just another case where doing better means you do worse.

Let's not even try to pretend this is a fair or well-designed system. Even Warren Buffet, surely one of the greatest beneficiaries of the system, has spoken out against it.

[dllthomas]

The article said,

"So now you owe an extra 10% on your $40K salary which is $4K. And you also owe 35% on that $50k which is around $18K."

Based on the numbers, this is clearly a misunderstanding of how tax brackets work, and not anything to do with the AMT.

[fist]

This is absolutely false, making more money can make you subject to the AMT (and potentially a higher marginal tax rate), but you will never be in a situation where if you make an extra $1000 you'll owe an extra $1001 in taxes.

[Afforess]

This is correct, and worth pointing out, because the OP has this line:

>So now you owe an extra 10% on your $40K salary which is $4K. And you also owe 35% on that $50k which is around $18K.

Which is false. The extra 50k is taxed more than your first 40k. Your overall effective tax rate increases, but it's incremental. Your first 40k is taxed the same with or without the extra 50k, but the extra 50k is taxed at a higher rate because it's in a higher marginal rate.