5 Reasons a Higher Tax Bracket is Good for You

by Thursday Bram · 26 comments

The other day, I was talking with a friend about a few ways that he could start earning some more money. He said something that absolutely stopped me in my tracks: he told me that he didn’t want to earn too much money because it would bump him into the next tax bracket. He was absolutely adamant that he didn’t want to be paying more in taxes.

But, in my mind, a higher tax bracket is a good thing. It’s not something to be avoided. Don’t get me wrong: I’m not quite crazy enough to go out of my way to pay extra taxes. Higher tax brackets, though, are evidence that you’re doing something right. Here are five reasons for that simple fact.

  1. A higher tax bracket means you’re earning more money: Do I need to say more? Or is there someone out there who thinks that more money is a bad thing? Even in a higher tax bracket, you can expect that you’ll have more money in your pocket at the end of the day.
  2. A higher tax bracket means you can claim more deductions and exemptions: The average taxpayer isn’t in a position to write off a whole lot on her taxes, which is why the IRS even offers the standard deduction. Most people would wind up with a higher tax bill if they didn’t. But when you’re earning more money, more opportunities open up to use your money in such a way that it can be deducted (like business expenses).
  3. A higher tax bracket means you can save more: There are a lot of ways to bring down your tax bill and many of them are good for your overall financial situation. More money means that you can put away the extra in tax-advantaged accounts for your retirement or your child’s education or for medical expenses, reducing your tax bill. Sure, you may hit limits on certain savings plans, but a good financial planner can help you put a lot of money away where you’ll be able to benefit from it in the future.
  4. A higher tax bracket means you can afford a better accountant: There are plenty of ways to keep your tax bills down if you’re earning plenty of money, although they require someone very familiar with the tax law. Assuming you don’t want to read up yourself, you just need a good accountant. It may not be a bad idea to see a financial planner, as well, but if your only goal is keeping your money out of the hands of the government, an accountant can provide plenty of options.
  5. A higher tax bracket means you have more freedom: If you’re earning enough money that your taxes really are growing by leaps and bounds, you’ve got a lot options. I wouldn’t suggest moving abroad to somewhere that doesn’t even have taxes, personally, but you can take steps to invest your money and make it grow in such a way that the IRS won’t be able to touch it. You can spend it on purchases that are tax deductible (fixing up your home so it’s more eco-friendly can put you in the way of a few tax breaks). You can donate a big chunk of change to charity. You can even pay your taxes willingly and then go out and spend your money however you like. Earning more money is a fast way to buy yourself some freedom, even if you have to send the IRS a check first.

I know there are plenty of people who look at taxes as one of the biggest burdens of their lives, but if you can change the way that you look at your taxes, you’ll eliminate a lot of stress from your life. While I wouldn’t go so far as to say that paying taxes is a badge of honor, I do keep in mind that the money is going to a good cause and that I benefit directly from it. Our tax dollars pay for roads, schools, police forces and far more, along with helping out people who can’t afford that higher tax bracket. There’s waste in the system, but I like to think that the country is still a lot better with our tax dollars than without.

Don’t be scared of a higher tax bracket, if only because it means that you’re earning more money overall. There are plenty of ways to keep your tax bills to a minimum, but they require you to earn money in the first place. Rather than being afraid of a higher tax bracket, it’s better to be afraid that you’ll wind up in a place where your income is so low that you don’t have to pay taxes.

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{ 26 comments… read them below or add one }

Barb Friedberg February 16, 2011 at 6:40 am

Hi David, You are in good company with this philosophy. Actually, Warren Buffett the great investor, philanthropist welcomes higher taxes. Who doesn’t want to have a higher income? Well, as you stated, a byproduct of higher income is….. higher taxes.

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Vtec April 10, 2013 at 8:18 am

The byproduct of making stuff is that people will steal it. Way to excuse theft, thief-friend.

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Anthony February 16, 2011 at 7:11 am

It sounds to me as if your friend may be confusing their tax bracket with their actual tax rate. To use an extreme example for ease of illustration, if one had an AGI of $34,000 in 2010 and is a single filer, one is at the very upper reach of the 15% bracket. That being said, one still does not pay 15% in taxes. That’s because one first pays just 10% on AGI up to $8,375 ($837.50 in this case), and then 15% on the AGI between $8,376 and $34,000 ($3,843.75 in this case), for a total tax of $4,681.75, which is 13.77% of income. If one makes another dollar, one moves into the 25% bracket, but this increases one’s tax liability by $0.25, because one only pays at the higher rate for dollars made above the lower bracket.

Just a thought, but the only “reason” I can see to fear moving up a tax bracket.

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Tracy February 16, 2011 at 1:00 pm

I think a lot of people just don’t get how taxes work – I’ve know very smart people who don’t get this and mix up a deduction and a credit, too.

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SavvyYoungMoney February 16, 2011 at 11:30 pm

I agree. It’s a very common misconception. I didn’t know until I decided to take a closer look at my taxes. I also remember voicing concerns about being taxed more if I go over a certain bracket to a group of people, and no one corrected me. Now I know there’s nothing wrong with earning more =)

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Ira July 27, 2011 at 7:13 am

I think you are exactly right that most people dont understand the Marginal Tax Rate in our system of graduated taxes. As you you say, they think that if they earn an extra dollar then that kicks them into the next tax bracket and that they will suddenly pay more in overall taxes… This is of course is not true. A good wiki is here with examples:
http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

From the wiki:
Example of a tax computation

Income tax for year 2009: Single taxpayer, no children, under 65 and not blind, taking standard deduction;

$40,000 gross income – $5,700 standard deduction – $3,650 personal exemption = $30,650 taxable income
$8,350 × 10% = $835.00
$30,650 – $8,350 = $22,300.00
$22,300.00 x 15% = $3,345.00
Total income tax is $835.00 + $3,345.00 = $4180.00 (10.45% effective tax)

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marci February 16, 2011 at 9:40 am

That’s an odd way of looking at things, in my opinion.
1. Why is making more money a better thing? It is not how much you make, but how much you DON”T spend… meaning, if you have no need to spend, then why bother with making more???
2. For some in the lower brackets, the standard exemption can be more than 50%… hard to do that with higher brackets… and in order to take a deduction, you have to have spent the money, and then you don’t always get to deduct ALL that you had to spend for the deduction…
3. You MAY be able to save more, but will you??? Rarely does that happen.
Usually, the spending increases even more than the money increased, and you save even less.
4. You can have the same accountant whether you make lots of money or little money… You get what you pay for. Mine is spendy, but his advice is even more important when I need every penny working it’s hardest for me.
5. I had LESS freedom when I was making more as I had to make sure I was at work, etc. Now, making much less, I have all the freedom in the world. Time is way more precious than the money ever was – and I have the option to do what I want. Money itself does not buy freedom – but I will grant that it can buy options that you might have to obtain thru bartering or time spent instead.
If you want something bad enough, there is almost always a way to obtain it without a large capital outlay. You just have to be a bit more creative.

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ChrisCD February 16, 2011 at 11:02 am

Good points all the way around. I would point out though that after a certain level of income you actually start losing deductions. However, I don’t sit up at night trying to figure out the “perfect” income level.

Money is a tool. It can be used well and poorly.

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Bargaineering February 16, 2011 at 12:18 pm

I think the tricky part comes when people don’t realize it’s a “marginal” tax rate. They think all of their income is taxed at a higher rate…

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KM February 16, 2011 at 4:54 pm

I think the reason for this might be that if your pay fluctuates from paycheck to paycheck and if you make even a bit more on one of them, you will see a dramatic increase in the taxes deducted if you cross a certain line. I am guessing it’s because it uses each paycheck to estimate your total wages for the year and if it sees you making more, it assumes your total yearly pay will be higher, so it deducts the necessary amount of tax. Now I might be starting to understand why we get a refund every year as it all smooths out during the tax filing time.

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krantcents February 16, 2011 at 12:22 pm

I always felt this way. As my income goes up, I have more choices how to reduce it legally.

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Financial Samurai February 18, 2011 at 11:00 am

Some good points Thursday, but do let me know how you will feel once you have to pay 35% Federal. Not a lot of fun, even if you are making more than $380,000 a year.

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Brad Jobs February 18, 2011 at 10:12 pm

Oh.. Thank you very much for the insights. This is really an eye-opener. Now, I don’t need to feel about my taxes. “Money is a tool. It can be used well and poorly.” This is really true, Chris CD.

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Ways to Make Money Guy February 21, 2011 at 8:57 am

I don’t like the idea of paying higher tax rates either, but as pointed out in a few of the comments here, those higher rates only apply to the income that is above a certain amount. To say one doesn’t want to make more money because some of it will be taken in taxes sounds like an excuse for a lack of motivation (although if they started taking 70% like in the 1970s I might lose motivation too).

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Vtec April 10, 2013 at 8:27 am

And 50% is somehow fine, unlike 70%??? Double standard.

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Barb Friedberg February 22, 2011 at 9:55 am

I’d like to mention that those of you with side businesses or self employment income have a wealth of LEGAL ways to reduce your taxes though deductible expenses on the schedule C. There are many many professional related expenses which can reduce your taxes. I also enjoy donating LOTS of old stuff to charity several times per year. That activity yields a nice tax deduction if you itemize.

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Jason L. March 31, 2011 at 9:23 am

Ummmmmm, all 5 of your reasons you gave why being in a higher tax bracket was good were the same… “You make more money” The next 4 were answering the question about why making more money is good…

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Vtech December 8, 2012 at 11:35 am

Right on. If I make 36,000, I keep 30,600…. And if I make 38,000, I only get to keep 27,360. 15 vs 28 percent tax brackets. How is that more money?

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Smile December 8, 2012 at 5:54 pm

Taxes are not only progressive (higher income = higher tax bracket), but also MARGINAL. This means that the higher rate is charged on only income above the next bracket’s threshold. As you appear to have missed several years’ worth of comments, allow me to illustrate with a basic example:

Bracket 1: 10% tax up to $1,000
Bracket 2: 20% tax up to $5,000

1. Let’s say you make $,1000. Your tax is $100 (10% of 1000). Net income = $900.

2. You get a promotion and now make $1,100. According to you, your tax is $220 (20% of 1100). Net income = $880, which is less than before the raise!

3. Let’s look at reality: Income of $1,100. Your tax is $120 (10% of 1000) + (20% of 100). Net income = $980. From your $100 raise, you keep $80.

Did you see what happened? Only income over the threshold was taxed. In other words, you pay the original rate on the first $1000, and only pay the higher rate on anything above $1000 (In this example, $100).

I implore you to look up the meaning of the phrase ‘Marginal Tax Rate’. More gross income means more net income.

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marci March 31, 2011 at 9:32 am

Jason – agree. This whole article assumes, incorrectly, that everyone wants more money… and that making more money is ‘good’…. I thinking “not needing” more money is the better of the two.

If one learns that to be happy with less money, there is sooooo much more freedom in that.

I missed speaking about giving to charity above…. you can give your time – which is usually more precious on a local level than the money.

Deductions? The Standard deduction is now $8400… over half my income :) I’d say that’s more than enough.

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steven martens April 23, 2011 at 7:37 pm

“Don’t be scared of a higher tax bracket, if only because it means that you’re earning more money overall.”

I vote for moving the tax bracket so that all of us are in the 90% bracket. Imagine how good it will feel for all of us “to be earning more money overall”.

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Bob Brock August 16, 2011 at 11:43 am

All of this simply supports replacing the current tax code with a VAT or another vastly simplified system. The complicated system we now have primarily exists to cover up loopholes and create accounting jobs.

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shadrack McCave May 19, 2012 at 7:31 pm

Almost every tax in existence is marginal so, as has been noted in far more detail than necessary already, moving into the 39.6% tax bracket means nothing for the $352k you earned to make it there. It means only that on your next $100k you’ll be paying $39,600 instead of $35,000. The few people who’d give up $60,400 ($100k-39.6k) to avoid paying the government an additional $4,600 belong to an exclusive club: morons. The real question we should be asking ourselves is: How is it somebody can earn $352,000 and fail utterly to understand anything about how taxes work.

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Julie Chris May 25, 2012 at 9:29 am

All of his advantages are associated with higher wealth, not a higher tax bracket. The tax bracket is associated with higher income, but they aren’t the same thing.

Julie

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Lora November 28, 2012 at 5:45 am

Your points are true enough but for many who do understand their taxes there are major steps in the system that you want to avoid. When it comes to qualifying for credits, an extra $5,000 can cost $5,000 in credits. The first year I analysed my taxes and started figuring them out – I realized if I’d put x dollars into an IRA it would have been the perfect investment with immediate return and taken all of our tax owed out of the equation. But making more money often takes more time. THAT is the choice often made differently. It’s not worth so much extra time away from family and passions to make the extra money. Live on less than what you make and enjoy every moment.

Only the extra money gets the higher tax. You are correct – many people do not understand that.

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Jgg April 10, 2013 at 6:55 am

A common misconception is moving up a tax bracket can reduce your income because of the high taxes. https://www.google.com/search?q=moving+up+a+tax+bracket&ie=UTF-8&oe=UTF-8&hl=en&client=safari

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