The Marginal Rate Misconception, Debunked

Here's the misconception, stated plainly: some people believe that if a raise pushes their income into a higher tax bracket, their take-home pay could actually go down. It cannot. Only the portion of income that falls inside the new, higher bracket is ever taxed at that bracket's rate — everything below it keeps being taxed exactly as before.

Using the bracket structure from the last lesson, imagine someone earning $95,000 gets a $10,000 raise, bringing them to $105,000. That crosses the $100,000 threshold into the 37% bracket. A worried reaction might be: doesn't that mean all $105,000 now gets taxed at 37%? It doesn't — only the $5,000 above $100,000 is taxed at 37%.

Bracket structure: 10% to $15k, 20% to $45k, 30% to $100k, 37% above $100k

Tax at $95,000:
  10% x $15,000 = $1,500
  20% x $30,000 = $6,000
  30% x $50,000 = $15,000
  --------------------------
  Total tax = $22,500  ->  take-home = $72,500

Tax at $105,000 (after the raise):
  10% x $15,000 = $1,500
  20% x $30,000 = $6,000
  30% x $55,000 = $16,500
  37% x  $5,000 = $1,850
  --------------------------
  Total tax = $25,850  ->  take-home = $79,150

A raise that pushes part of your income into a higher bracket can reduce how much of the raise you keep, but it can never make your total take-home pay ____.

In the worked example, why did take-home pay rise by $6,650 instead of the full $10,000 raise?

In the example, the worker's take-home pay after the raise was still higher than before the raise.

This is precisely why turning down a raise, or extra freelance work, out of fear of a higher bracket almost never makes mathematical sense. The new bracket only ever applies to the new income above the threshold, and that new income, even taxed at a higher rate, still adds to what you keep.