More than half of Americans earning more than $100,000 a year say they're living paycheck to paycheck, according to a report from PYMNTS and LendingClub. This may be a result of a sneaky behavioral phenomenon called lifestyle creep, which is when a person's spending habits expand as their income rises. The rise in the cost of living complicates matters, as incomes have not kept up with inflation. Watch the video above to learn more about why Americans struggle to keep money in their pockets.
To be fair, in places where income taxes are bracketed rather than in smooth percentages, it can happen. It’s much more common with bonuses and heavy OT to jump you up for a single paycheque, though.
I’m unclear on how a tax rate of, say, 30% can eat 100% of some non-zero value.
Like, if you went from Gross: 1000, net 700 to gross 1100, you’re going to go to 770.
If income above 1000 is taxed at a higher rate of like 50%, you’d still keep half of the new 100 on top of whatever you were paying before for the bottom 1000.
Wait I think I figured out how people think it works. If you don’t understand tax brackets and think that your entire income is taxed at the new rate, there are some cases that could a net loss. That’s not how taxes work anywhere in the US to my knowledge.
Let’s say you have a gross income of 10,000 because that’s a nice round number. And you pay 10% of that in cases, because that’s also a nice round number. Your net take home is $9000.
Let’s say you then get a huge pay raise to 20,000. And in this incorrect model of taxation, that puts you in a new tax bracket of 70%. You would then take home 20,000 * .3 = $6000, which is less than your net was with a base of 10,000.
But, again, that’s not how tax brackets work so far as I’m aware anywhere in the US.
What would actually happen is the first 10,000 would be taxed at its rate. 10% in this case. You’d pay that $1000. If the next bracket went from 10,001 to 20000 and was at 70%, you’d pay 7000 of that chunk. So your net take home would be 9000 + 3000 = $12,000, which is definitely more than the $9000 you took home with a gross of 10k. Except the real numbers are different, filing status matters, and there’s different incomes and investments that complicate things. Here are some numbers: https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
Progressive taxation should be taught everywhere if it’s not. I think I learned it in like 10th grade, but i’m old and my memory is foggy.
There is one instance in the US where you can lose money from a raise. You can deduct 100% of student loan interest as an “above the line” deduction (not an itemized deduction) unless you make more than $72,000 a year, and then you can deduct none of it.
Some people pay thousands of dollars in student loan interest a year. A $1 per year raise could put them over the line and cost them whatever the marginal tax rate is on those thousands of dollars.
It’s a stupid cliff of a line. It should be a curve.
No it can’t, with tax brackets you are not taxed at the top rate for your whole income. Say you make 90k and the tax brackets go 0-15k:0%, 15k-30k:10%, 30k-40k:15%, 40k-50k:20%, 50k-100k:25% 100k+:30%. On the first 15k you make you pay $0 in tax on the next 15k you pay $1.5k, on the next 10k you pay $1.5k, on the next 10k you pay $2k, and on the last 40k you pay $10k. Total tax of $15k(~17% of 90k). Now say you get a raise and are making $110k. On the first 50k you are still only paying $5k, on the next 50k you are now paying $12.5k, and on the last 10k you are paying $3k. Total tax bill $20.5k(~19% of 110k). If you were taxed at the top rate for your total income then the first tax liability would have been $22.5k(25% of 90k) and the second would have been $33k(30% of 110k). That’s part of the difference between actual tax rate and effective tax rate, the other part being things like tax incentives, write-offs, and deductions.
“To be fair,” no it can’t, at least not in the US. The top tax bracket for income I think is around 37%. And the next lowest is in the high 20s, but I don’t know what the $ amount is, but I think you gotta clear a half mil + a year before you get to that 37%. So make a mil a year? 37%. 2 mil? 37%. No matter what you’re making you’re not getting to 100%. So I don’t know where you live, but here in the US there’s no way to hit 100% on personal income tax, the tax that’s being discussed.
Never heard of 100% taxing here, what I have seen is raises and promotions ending up in a slightly smaller paycheque. Whether that’s due to other factors such as a higher misaligned bracket of state medical insurance or benefits, union fees, I’m not entirely sure, it was more of a warning to watch your first couple of paycheques after a raise.
I would really need to see the math on this. All of the numbers. Plenty of people bitch and moan about taxes, but there’s no way income tax should result in a continually smaller paycheck because the recipient got a raise, nor should a raise be consumed entirely by taxes. Anyone who tells a story about losing all their raise to tax isn’t telling the whole story most likely, like filing for too many withholding exemptions on the W4, paying less tax, then getting slammed with a tax bill “consuming all their raise” or something.
Now, I have heard of people running into issues with the AMT, but that’s for people already making a pretty good amount of money, and that limits (crudely explained) says even though you made a bunch of money more and have a ton of write offs/deductions, the AMT floor won’t let the filer get all the deductions so they pay more tax. That also might come up if one sells a house or something and brings in a bunch of money. But that’s not a situation most people face, and they shouldn’t see it regularly. It was intended to prevent wealthy people from skipping out on taxes.
To be fair, in places where income taxes are bracketed rather than in smooth percentages, it can happen. It’s much more common with bonuses and heavy OT to jump you up for a single paycheque, though.
I’m unclear on how a tax rate of, say, 30% can eat 100% of some non-zero value.
Like, if you went from Gross: 1000, net 700 to gross 1100, you’re going to go to 770.
If income above 1000 is taxed at a higher rate of like 50%, you’d still keep half of the new 100 on top of whatever you were paying before for the bottom 1000.
Wait I think I figured out how people think it works. If you don’t understand tax brackets and think that your entire income is taxed at the new rate, there are some cases that could a net loss. That’s not how taxes work anywhere in the US to my knowledge.
Let’s say you have a gross income of 10,000 because that’s a nice round number. And you pay 10% of that in cases, because that’s also a nice round number. Your net take home is $9000.
Let’s say you then get a huge pay raise to 20,000. And in this incorrect model of taxation, that puts you in a new tax bracket of 70%. You would then take home 20,000 * .3 = $6000, which is less than your net was with a base of 10,000.
But, again, that’s not how tax brackets work so far as I’m aware anywhere in the US.
What would actually happen is the first 10,000 would be taxed at its rate. 10% in this case. You’d pay that $1000. If the next bracket went from 10,001 to 20000 and was at 70%, you’d pay 7000 of that chunk. So your net take home would be 9000 + 3000 = $12,000, which is definitely more than the $9000 you took home with a gross of 10k. Except the real numbers are different, filing status matters, and there’s different incomes and investments that complicate things. Here are some numbers: https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
Progressive taxation should be taught everywhere if it’s not. I think I learned it in like 10th grade, but i’m old and my memory is foggy.
There is one instance in the US where you can lose money from a raise. You can deduct 100% of student loan interest as an “above the line” deduction (not an itemized deduction) unless you make more than $72,000 a year, and then you can deduct none of it.
Some people pay thousands of dollars in student loan interest a year. A $1 per year raise could put them over the line and cost them whatever the marginal tax rate is on those thousands of dollars.
It’s a stupid cliff of a line. It should be a curve.
No it can’t, with tax brackets you are not taxed at the top rate for your whole income. Say you make 90k and the tax brackets go 0-15k:0%, 15k-30k:10%, 30k-40k:15%, 40k-50k:20%, 50k-100k:25% 100k+:30%. On the first 15k you make you pay $0 in tax on the next 15k you pay $1.5k, on the next 10k you pay $1.5k, on the next 10k you pay $2k, and on the last 40k you pay $10k. Total tax of $15k(~17% of 90k). Now say you get a raise and are making $110k. On the first 50k you are still only paying $5k, on the next 50k you are now paying $12.5k, and on the last 10k you are paying $3k. Total tax bill $20.5k(~19% of 110k). If you were taxed at the top rate for your total income then the first tax liability would have been $22.5k(25% of 90k) and the second would have been $33k(30% of 110k). That’s part of the difference between actual tax rate and effective tax rate, the other part being things like tax incentives, write-offs, and deductions.
hmmmm I need an actual example.
“To be fair,” no it can’t, at least not in the US. The top tax bracket for income I think is around 37%. And the next lowest is in the high 20s, but I don’t know what the $ amount is, but I think you gotta clear a half mil + a year before you get to that 37%. So make a mil a year? 37%. 2 mil? 37%. No matter what you’re making you’re not getting to 100%. So I don’t know where you live, but here in the US there’s no way to hit 100% on personal income tax, the tax that’s being discussed.
Not US.
Never heard of 100% taxing here, what I have seen is raises and promotions ending up in a slightly smaller paycheque. Whether that’s due to other factors such as a higher misaligned bracket of state medical insurance or benefits, union fees, I’m not entirely sure, it was more of a warning to watch your first couple of paycheques after a raise.
I would really need to see the math on this. All of the numbers. Plenty of people bitch and moan about taxes, but there’s no way income tax should result in a continually smaller paycheck because the recipient got a raise, nor should a raise be consumed entirely by taxes. Anyone who tells a story about losing all their raise to tax isn’t telling the whole story most likely, like filing for too many withholding exemptions on the W4, paying less tax, then getting slammed with a tax bill “consuming all their raise” or something.
Now, I have heard of people running into issues with the AMT, but that’s for people already making a pretty good amount of money, and that limits (crudely explained) says even though you made a bunch of money more and have a ton of write offs/deductions, the AMT floor won’t let the filer get all the deductions so they pay more tax. That also might come up if one sells a house or something and brings in a bunch of money. But that’s not a situation most people face, and they shouldn’t see it regularly. It was intended to prevent wealthy people from skipping out on taxes.