Posted by Beaton Accounting

Getting A Raise and how it affects your taxes: Explore the Facts

Getting A Raise and how it affects your taxes: Explore the Facts

Getting a raise makes you feel happy because it is an acknowledgment of your hard work and talent. Unfortunately, this raise will bump you into a new tax bracket. For some people, a pay raise can’t be a happy time because they think about Getting A Raise and how it affects your taxes. People believe that there is no use of a new raise if your income will be taxed at a high rate and you will get a small paycheck after all deductions. It is a misconception only that the people will be taxed at a higher tax bracket after a significant increase in their employment income. Keep it in mind that only a particular percentage of their income will be taxed at a high rate.

Effects of Raise on Taxes

The annual income of John was $45,000 before a raise in 2016, and he is expecting to earn almost $49,000 in 2017. The lowest bracket for 2017 tax caps at under$46,000. It means that the initial $46,000 will be taxed at 15% and for 2017, the John has moved to 20.5% tax bracket. 

It doesn’t mean that the whole $49,000 of John will be taxed at the rate of 20.5%. The $46,000 will remain in the lower tax bracket, and the remaining amount is moved to the next bracket. It means that the new rate will be applicable on $4,000 so there will be a little different in previous and new taxes. The payroll department has to follow applicable rules to deduct the exact amount from a weekly payment to cover this small increase.

Increase in the Salary of Spouse

If the spouse of a person receives a raise in salary and this person is claiming the spousal sum. His/her claim can decrease on the next return. Income will deduct a dollar from credit.

Increase in the Salary of Dependent

A dependent is getting a raise and how it affects your taxes. This question can increase complications in the life of a taxpayer with defendants. The effect of this raise is similar to the amount of spouse. The sum of a qualified dependent will factor in the income of dependent. If teenager of a single partner starts earning money, you may see a small credit at the time of tax.

Effects of Benefits and Credits

An increase in taxable revenue may have other consequences. Considering the size of raise, your income can surpass the credit limits like the amount of age. Moreover, the medical expenditure credit exempts the initial 3% of income as deductions. With an increase in your pay, you will have a threshold of 3%. 

Understand Important Tax Terms

You must know some tax terms to understand the treatment of your pay raise in your tax return.

Progressive System of Tax

The rate of tax may increase in a particular tax system as the base of taxable amount increases. The tax system of the United States is progressive.

Marginal Rate of Tax

The term marginal tax proportion refers to the tax rate that applies to every extra dollar of a taxpayer. For instance, your annual salary is $34,500 that may put you in 15% marginal bracket. The IRS may require a payment of $850 + 15% of the total amount to make more than $8,500. The sum over $8,500 is $26,000; therefore, you own $850 + $3,900 IRS amount for $4,750.

Effective Rate of Tax

The above example shows that marginal rate of tax was 15 percent, but the average tax rate on entire income is lower like 13.8%. It may be an average rate of tax to pay the effective rate of tax.

With a change in tax situation, you can expect changes in payroll deductions. If you choose another job, you can ask your staff representative about this increase and tax deduction from your salary. Under a progressive tax structure, you will pay different tax amounts on different parts of income. After getting a raise, you have to pay a high tax rate on extra salary. There is no need to worry about paying a high tax on entire income. You will get a slight change in your new tax. I hope that Getting A Raise and how it affects your taxes will be clear now.


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