# Will Moving to a Higher Income Tax Bracket Cost You Money?

Getting a raise sounds great until you get scared the extra income will bump you into a higher income tax bracket. Take a deep breath and relax, because your fear is mostly unfounded. Moving into a higher tax bracket will cost you more, but only on the portion of your income that falls in that bracket.

## Tax Bracket Basics

Governments use tax brackets to impose a higher rate on people who earn more money each year. For example, a government might tax your first \$15,000 at 10 percent, your next \$30,000 at 15 percent and your next \$50,000 at 25 percent. That way, a person of modest means who only makes \$14,000 per year pays 10 percent on his entire income, whereas a person who makes \$40,000 pays the 15 percent rate on the income exceeding \$15,000.

To figure your taxes, split up your income into the amounts that fall in each bracket. Then, multiply each portion of your income by the tax rate for the bracket that it falls in. For example, say you have \$40,000 in taxable income and that the first \$15,000 is taxed at 10 percent and the next \$30,000 is taxed at 15 percent. Your first \$15,000 is taxed at 10 percent, which comes out to \$1,500. The remaining \$25,000 all falls in the 15 percent bracket, so that adds \$3,750 to your tax bill, bringing your total to \$5,250.

## Moving Into Higher Bracket

If you have additional income that pushes you into a higher income tax bracket, only the portion of the extra income that falls into the higher bracket gets taxed at the higher rate. For example, say that at the end of the year, your employer gives you a \$6,000 bonus, which, when added to your \$40,000 base, gives you a total of \$46,000 of taxable income. If the 25 percent starts at \$45,000, only the last \$1,000 of your income is taxed at the 25 percent rate -- not the entire \$46,000 of income.

## Increases Deduction Savings

Though it might come as little consolation, being in a higher income tax bracket also means that your deductions save you more money on your taxes. To figure your deduction savings, multiply your marginal rate by the amount of your deduction. For example, if you're in the 15 percent tax bracket, a \$1,000 deduction saves you \$150. But, if you're up in the 25 percent bracket, that same \$1,000 deduction now saves you \$250.

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