In a Higher Tax Bracket in 2024? Here's Why That's a Good Thing

When you get a pay raise, you may worry that the extra money will push you into a higher tax bracket. It's true that earning more money means paying more taxes. But even if some of your money is taxed at a higher rate, you'll still have more money in your pocket. Here's why being taxed in a higher bracket isn't something you should worry about.

How tax brackets really work

The IRS recently announced the following tax brackets for 2024:

As you can see, income taxes are progressive, which means that higher amounts earned are taxed at higher rates. But being taxed in a higher bracket doesn't mean that all the money you earn is taxed at a higher rate.

It's helpful to think of income tax brackets as buckets. If you earn above a certain threshold, the extra money will flow into the next bucket, i.e., the higher tax bracket. But only the money above that threshold flows into the next tax bracket; the rest of your money is still taxed at the same rate.

Here's an example of how it works: Suppose you're earning $45,000 and you're a single tax filer. Your marginal tax rate -- meaning the highest tax rate you pay -- would be 12%. But your overall tax rate would be calculated as follows:

• You'd owe 10% in taxes on the first $11,600 you earned, or $1,160.
• You'd owe 12% in taxes on the next $33,400 ($45,000-$11,600) you earned, or $4,008.

Your total tax bill, before accounting for tax deductions and credits, would be $5,168.

Now let's say you get a $5,000 raise, which increases your income to $50,000. Suddenly, you find yourself in the 22% tax bracket. But alas, you shouldn't panic or beg your boss to rescind your raise. Even though you've jumped from the 12% bracket to the 22% bracket, your overall tax rate didn't increase to 22%. Instead, here's what your tax bill would look like (again, before accounting for tax credits and deductions):

• You'd owe 10% in taxes on the first $11,600 you earned, or $1,160.
• You'd owe 12% in taxes on the next $35,550 ($47,150-$11,600) you earned, or $4,266.
• You'd owe 22% in taxes on the remaining $2,850 ($50,000-$47,150) you earned, or $627.

Your total tax bill would climb to $6,073, which is $2,065 more than you were paying when you earned $45,000. But your income is $5,000 higher, which means you'll take home an extra $2,935 after taxes.

Being in a higher tax bracket does mean that you owe more in taxes. But it's still a good thing because your paycheck is higher.

How to lower your taxable income

When you file your taxes, you won't have to do the math by hand to figure out how much you owe. The best free tax software makes it easy to calculate your tax bill and find out what tax credits and deductions you qualify for. These programs also help you determine whether you're better off claiming the standard deduction versus itemizing.

But if you want to lower your tax bill for 2024 and beyond, here are some easy ways to do so, even if you don't itemize deductions:

• Contribute to a traditional 401(k)
• Contribute to a traditional IRA
• Fund a health savings account (HSA)

Though you have options for reducing your tax bill, don't sweat it if your income is likely to be taxed in a higher bracket in 2024 versus 2023. Ultimately, being in a higher tax bracket means you have more money in your pocket -- which is a good thing.