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Financial Planning / Tax Strategies


Subject:  Re: Tax rates: is it worth it to work? Date:  3/24/2001  1:21 PM
Author:  RheS Number:  48923 of 127642

mlk58 wants to know:

"I have heard people say it's not worth it for the wife to go to work, because "it will just raise our tax bracket." The implication is that having extra income coming in could actually cost the family money overall because of higher taxes."

"This seems wrong to me. Isn't it the case that higher tax rates only apply to marginal income? So if husband makes $50,000 and is taxed at, say 33%, and wife makes $25,000 and raises the couple's marginal tax rate to 38% or whatever, the first $50,000 will continue to be taxed at 33% and only the additional income will be taxed at the higher rate. So the extra income will definitely benefit the family. But I have heard lots of people say that the extra income will cause ALL the income to be taxed at a higher rate."

You're right, of course. And the only explanation for the confusion is that, in general, people are idiots. This must be one of those urban legends, or something!

Actually, there are a few tax-related benefits of having a lower income that are lost when you have a higher income... like being able to contribute to a Roth IRA... but they aren't so exciting that you should pass up earning income to have them.

Fool On!

Dick Smith
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