There is indeed a widespread misconception that if more income pushes you into a higher bracket it might make you total after tax income go down. Many people think if you are in the N% bracket it means you tax is N% of your taxable income.
The first shows what tax would be on a single person in 2023 whose income is entirely salary and whose only deduction is the standard deduction, for income up to $1 million.
The second shows what the tax would be as a fraction of your total income.
While income tax and short term capital gains do work like that (an increasing marginal rate) long term capital gains (LTCG) do not. They are paid fully at the bracket you fall in to. When calculating tax rates (US federal, states may vary) you apply income first and capital gains second to determine your rate.
If you're filing single the LTCG threshold is $518,900 in 2024. So as an example, if you made $400,000 in income and $118,000 in LTCG that would put you just under the threshold to pay 15%. you'd calculate ordinary income tax on the $400,000 and then you'd pay $118,000x15%=$17,700 in LTCG.
But if you made just $2000 more in LTCG you'd pay much more as you'd be bumped into the higher 20% rate. You'd end up paying $120,000x20%=$24,000 in LTCG taxes, an increase of $6300 in taxes on just and additional $2000 in gains.
First, let's state that you are referring to taxable income, not gross income. The former is usually non-trivially smaller than the latter, due to adjustments (including pre-tax paycheck deductions) and itemized/standard deduction.
Using 2023 numbers (since we don't know whether 2024 tax law will change between now and the end of the year), and your dollar amounts:
$400K of ordinary taxable income tops out at 35% marginal rate, the total tax is $111,895.
I am not finding anything suggestive about it, except repetition. Tax brackets awareness is important when you have more thing going on besides your w2. Especially for things that can't wait till tax return due date, like Roth conversion.
the concept of additional income "push you into a different tax bracket" is a misnomer. Only the income above the bracket line gets taxed at the higher rate. There isn't a reason to avoid getting more income in a given year unless you have a way to defer it (like some retirement accounts allow)
In the context of the article, it makes sense. If you have a choice to sell a bunch of stock on either December 31 or January 1, and selling the stock would put you into a higher tax bracket, it makes sense to sell enough stock on December 31 to "fill up" your earlier year tax bracket, and sell the rest on Jan 1.
Or in a simpler use case, you know one year or the other will be a low income year, you sell the stock in that year.
The context of the article is a tech employee getting ESPPs. Such a person is already nearing the top of the tax bracket anyway. It's at most going to mean two or three percent difference on just the capital gains. This is, for almost everyone, going to be a completely unnoticeable difference in practice.
Let's say you make $100,000 and a whopping $50,000 of it is RSUs and ESPPs. You've been very lucky and the stock portion is now worth $75,000. You sell. Your federal bracket has gone up by 2% and your California bracket has stayed the same. You will owe an additional $500 in taxes. This is just about the worst case scenario where you're not making that much for tech and your comp is exactly on the edge of a tax bracket and your comp is 50% equity and your company went up by 50% since vesting.
Except in reality Jan 1 is always a holiday and Jan 2 is always a volatile trading day, so your tax savings may not be worth the risk of the price swing on the first trading day of the new year.
The thing being disputed isn’t timing etc. it’s the concept of being “pushed into” a tax bracket. In the US at the federal tax level your income is taxed in buckets.
If the brackets are 10,000 @5%; 100,000 @10%, if you make 100,000 your first 10,000 is taxed at 5% and the next 90,000 is taxed at 10%.
Outside of long/short term gains, all things being equal, the timing is not especially important
“However, New York also has a provision called tax-benefit recapture, which essentially turns its progressive tax into a flat tax for high earners, says Eric Bronnenkant, head of tax at Betterment and a certified public accountant.”
I see you made it to the fourth bullet point in the first paragraph of one of the two links.
It actually matters - or can matter, anyway - if you have any event pushing your income above $1M (if filing single) because of the change in deduction treatments.
The actual effect of recapture schemes is to increase marginal tax rates on mid-high incomes while leaving the highest brackets mostly untouched, and then lie about it.
I understand the sentiment, too many people have this crazy idea that they might be on the upper cusp of their tax bracket and a tiny bit more income will somehow end up costing them more.
But it would be sad if the entire article is dismissed by HN readers just because they tripped on the one line you point out.
Imagine instead that the author said (and I would argue they probably meant), "push more of your income or benefits exercised into a higher tax bracket".
I think this is what most people mean since it is behind the strategy of holding on to benefits until you are retired (or in a lower tax bracket) before exercising them.
Being pushed into a different tax bracket is something people should always keep in mind. Different tax brackets affects the calculus of which 401k to use (post/pre tax), decisions about liquidating tax deferred assets, it goes on
No it doesn't. Not for people who earn tech salaries which is what this article is pointed at. You're always going to max out pre-tax 401k first, then backdoor 401k post-tax after if you have enough spare income.
Moving up a bracket doesn't change all the previous brackets, it just affects money past that level. It's not like a hard line that you cross and it changes the whole picture.
If you think otherwise, give us a scenario where is matters.
Scenario 1: If you believe that your marginal tax rate after retirement will be higher than your marginal tax rate now, you would prefer to max out your Roth than you pre-tax now. Many people in tech will be taxed at the top income rate now and at the top income rate in retirement as well; it seems likely that tax rates will have to rise in the future as we're obviously not running a sustainable balance of federal inflows and outflows now.
Scenario 2: If you want to funnel as much money as possible into your employer's plan, you might want to use a Roth vehicle to do that. (Your pre-payment of taxes on it means that $100 in a Roth is worth more than $100 in a pre-tax vehicle.) Your 401k plan might not support mega backdoor 401k contributions (many plans don't allow after-tax contributions [distinct from Roth]) and you might have other IRAs that would drag in the pro-rata rule for backdoor IRA contributions.
If you’re at the limit for the middle capital gains bracket because of one-time gains and you can afford to wait, you should definitely defer liquidating assets to the following tax year.
Yeah this is important for planning, and it becomes even more complicated when you're trying to optimize with AMT involved, reclaiming credits, etc. These things require multi-year planning, and the expected tax bracket is a significant factor.
This comment suggests you don’t understand how taxes work in many scenarios. If I receive more ordinary income (whatever the source and reason it is treated as such) it is added to the year I received it. To minimize taxes, I will mot want to receive this additional ordinary income during the year I already would have already had the most income. That’s what being pushed into a different tax bracket means.
Example: year one 50k income 22% marginal tax. Year two 180k income 32% marginal tax. You have 100k more ordinary income. You will pay less tax if it occurs in year one.
Yes for this to matter you need to have some control over the order of payments. This is most commonly a 401k. Otherwise, it’s likely to be relevant through some form of business ownership. Perhaps you have a big contract coming in, or you are self employed, or you are receiving a bonus, or perhaps you own some shares where you could elect to sell when they only qualify as ordinary income as discussed by the original article.
I mean, if you were on low income benefits this might be an issue, where earning more may cause you to lose benefits. But I doubt anyone working in tech is facing that dilemma
