4 ms·

> I have a couple friends right now that do not want wage raises because "it will knock them into the next tax bracket". is that not a real thing where you liv

> I have a couple friends right now that do not want wage raises because "it will knock them into the next tax bracket". is that not a real thing where you live?

whateveracct 7y ago
I think it's more that getting knocked into the next tax bracket is better than making less money. Because you inherently still make more money due to how tax brackets works. I'm guessing this is an allusion to how many people don't understand how tax brackets work and think that you can make more money, get taxed more, and then end up with less than if you never made more money.
Humdeee 7y ago
Tax brackets do, but what I was insinuating is that those select friends (bless their heart) believe that all of your income is taxed in the highest singular bracket that you reach.
Proziam 7y ago
So many people don't understand how tax brackets actually work. They think if they make one more dollar they pay X% more tax on every single dollar they earned. It's actually terrifying to me how little understanding the average person has of finance.
rchaud 7y ago
It isn't that black and white. For example, in Canada, I can contribute a certain amount into a tax-free savings account each year. TFSAs can be created to hold ETFs, Mutual Funds and other types of investments. I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500. I can contribute more annually as long as my total is under $69.5k. With a raise, I can accelerate my contributions and continue to enjoy tax-free gains on it. My personal average income tax rate might go up, but that's offset to an extent by whatever returns I'm making through my portfolio.
- jeromegv 7y ago
  No, that's not how it works. It is a marginal tax bracket. If you get in the higher bracket, it's only the new money that gets taxed at the higher rate, not your full salary. It has absolutely nothing to do with your contribution to retirement accounts. You can invest more and contribute more to your tax free retirement accounts with a higher salary (up to a point) but even if you didn't, that wouldn't make a difference.
  - rchaud 7y ago
    I'm aware of how marginal tax rates are applied. That's why I said "while my average tax rate may increase" (in a hypothetical situation), I can still net more overall due to increase in the absolute $ return on the TFSA portfolio. I'm responding with respect to the OP's comment about beign bumped into a higher marginal tax bracket. Just because you are, doesn't mean you'll automatically end up with less discretionary income.
    - brailsafe 7y ago
      I feel like I'm misreading this, but regardless of whatever investments you have, you'd come out with more as your income increases into higher marginal tax brackets correct? As in, if I was making 94k and got a raise to 98k, I'd come out with more regardless of what's in my TFSA.
  - anon73044 7y ago
    I thought the point of contributing more to the tax free account was to lower the total taxable income? Same with making charitable contributions.
- _whiteCaps_ 7y ago
  Just want to be clear on this point: > I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500 As of 2020, the total you can contribute into a TFSA over your lifetime is $69500. But it's not a limit of what can exist in your account. Gains you make in the account do not count toward your limit.

> I have a couple friends right now that do not want wage raises because "it will knock them into the next tax bracket". is that not a real thing where you live?

whateveracct 7y ago

I think it's more that getting knocked into the next tax bracket is better than making less money. Because you inherently still make more money due to how tax brackets works. I'm guessing this is an allusion to how many people don't understand how tax brackets work and think that you can make more money, get taxed more, and then end up with less than if you never made more money.

Humdeee 7y ago

Tax brackets do, but what I was insinuating is that those select friends (bless their heart) believe that all of your income is taxed in the highest singular bracket that you reach.

Proziam 7y ago

So many people don't understand how tax brackets actually work. They think if they make one more dollar they pay X% more tax on every single dollar they earned. It's actually terrifying to me how little understanding the average person has of finance.

rchaud 7y ago

It isn't that black and white. For example, in Canada, I can contribute a certain amount into a tax-free savings account each year. TFSAs can be created to hold ETFs, Mutual Funds and other types of investments. I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500. I can contribute more annually as long as my total is under $69.5k. With a raise, I can accelerate my contributions and continue to enjoy tax-free gains on it. My personal average income tax rate might go up, but that's offset to an extent by whatever returns I'm making through my portfolio.

jeromegv 7y ago
No, that's not how it works. It is a marginal tax bracket. If you get in the higher bracket, it's only the new money that gets taxed at the higher rate, not your full salary. It has absolutely nothing to do with your contribution to retirement accounts. You can invest more and contribute more to your tax free retirement accounts with a higher salary (up to a point) but even if you didn't, that wouldn't make a difference.
- rchaud 7y ago
  I'm aware of how marginal tax rates are applied. That's why I said "while my average tax rate may increase" (in a hypothetical situation), I can still net more overall due to increase in the absolute $ return on the TFSA portfolio. I'm responding with respect to the OP's comment about beign bumped into a higher marginal tax bracket. Just because you are, doesn't mean you'll automatically end up with less discretionary income.
  - brailsafe 7y ago
    I feel like I'm misreading this, but regardless of whatever investments you have, you'd come out with more as your income increases into higher marginal tax brackets correct? As in, if I was making 94k and got a raise to 98k, I'd come out with more regardless of what's in my TFSA.
- anon73044 7y ago
  I thought the point of contributing more to the tax free account was to lower the total taxable income? Same with making charitable contributions.
_whiteCaps_ 7y ago
Just want to be clear on this point: > I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500 As of 2020, the total you can contribute into a TFSA over your lifetime is $69500. But it's not a limit of what can exist in your account. Gains you make in the account do not count toward your limit.