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Yahoo
06-05-2025
- Business
- Yahoo
Do Higher Earnings Mean You'll Take Home Less Because of Taxes?
Many workers worry that earning more, through a raise or bonus, could push them into a higher tax bracket and actually reduce their take-home pay. Learn More: Trump Wants To Eliminate Income Taxes: Here's What That Would Mean for the Economy and Your Wallet Find Out: The New Retirement Problem Boomers Are Facing However, that fear is based on a common misunderstanding of how the U.S. tax system works. Do higher earnings mean you'll take home less because of taxes? Here's what you need to know about how tax brackets impact your take home pay. The Myth Many people believe that earning more money, through a raise or bonus, could actually cause them to lose money after taxes. This widespread misconception stems from confusion about how tax brackets actually apply to income. 'Many people have a misconception or 'fear' of even jumping a tax bracket due to a misunderstanding of how progressive tax systems work,' said Nicolette Davicino, a certified financial planner and financial advisor at Armstrong, Fleming & Moore. For You: Here's How Much Your State Collects on Every Type of Tax Davicino explained, 'Many people think that moving into a higher tax bracket means their entire income will be taxed at that higher rate, which would reduce their pay and mean they take home less pay. In reality, only the portion of income within the higher bracket will be taxed at the new rate.' How U.S. Tax Brackets Really Work The U.S. tax system uses marginal tax rates, which means only the income that falls within each bracket is taxed at that bracket's rate. This ensures that earning more will never reduce the after-tax income. 'To the extent that their taxable income now exceeds $47,150 for 2025, the amount over $47,150 is taxed at the much higher 22% tax rate,' said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. 'The rest of the taxpayer's income remains taxed at the lower 10- and 12% tax rates.' Luscombe added that bonuses are often subject to higher withholding, which can make the take-home seem smaller at first. But this doesn't mean individuals are taxed more on all of their income, just on the portion above the bracket threshold. What About Bonuses? A raise or bonus can push a portion of a taxpayer's income into a higher tax bracket, but only that portion is taxed at the new, higher rate. The remainder of their income continues to be taxed at lower rates, so their overall take-home pay still increases. For example, Luscombe said a taxpayer with a modified adjusted gross income of $147,000 who receives a $5,000 bonus in 2025 would not move into a higher tax bracket. However, their total income could exceed eligibility for other tax credits like the Clean Vehicle Credit, which has a $150,000 cap for individuals.
Yahoo
10-04-2025
- Business
- Yahoo
Tax Day Countdown: 4 Tax Rules To Know Before Converting Your IRA Account
Roth IRAs are a popular retirement savings and investment tool, especially for those expecting to be in a higher tax bracket in retirement, because of the tax advantages of certain IRA contributions to a Roth. However, converting your Roth account also comes with immediate tax consequences that require careful planning if you are considering doing so this tax year. Learn More: Find Out: Retirement plans in the United States can get complicated, especially when you factor in taxable income or modified adjusted gross income (MAGI). Here are four tax rules to understand before you convert your IRA to a Roth account to avoid costly surprises and maximize benefits. Converting an IRA to a Roth account means moving money from traditional IRA contributions you've made or from another pre-tax retirement account into a Roth IRA. It makes all pre-tax contributions and earnings taxable during the year of the conversion. In the future, qualified withdrawals from the Roth IRA will be tax-free. 'A conversion is beneficial if you expect to be in a higher tax bracket in retirement,' said Ines Zemelman, an IRS-authorized enrolled agent, tax professional and founder and president of TFX, a tax advisory firm. 'If you are planning to retire abroad, consider cross-border tax implications.' Zemelman recommended spreading the conversions across multiple years to avoid higher tax brackets while minimizing tax liability. The ideal time for a Roth conversion is during the early retirement years, before Required Minimum Distributions (RMDs) or Social Security begin. 'It's beneficial for legacy planning, as Roth IRAs pass tax-free to heirs,' Zemelman said. 'Converting funds before retiring abroad can avoid unfavorable or double-taxation in some countries.' In addition, many employers offer in-plan Roth conversions, said Elizabeth Schleifer, a financial advisor at Armstrong, Fleming & Moore, Inc. 'Employees can transfer money from their traditional (pre-tax) 401(k) to a Roth 401(k) in the same plan,' Schleifer said. 'Employees pay taxes on the converted amount. So, it makes sense to do this if you have an unusually low-income year, either due to a large deductible expense or a drop in income.' Be Aware: A Roth conversion increases your adjusted gross income (AGI) for the year, which can affect several areas of your financial life, not to mention tax deductions. 'A higher AGI may lead to increased Medicare premiums under IRMAA (Income-related Monthly Adjusted Amount), taxation of a larger portion of your Social Security benefits or reduced eligibility for tax credits like the Child Tax Credit or the Saver's Credit,' said Arron Bennett, founder and CEO of Bennett Financials. 'These considerations should be part of an overall financial plan to ensure the conversion aligns with your broader goals.' Bennett said that incorporating other investments, such as in the oil and gas sectors, can help mitigate the tax impact of the conversion and reduce its effect on other financial areas and tax dollars you spend. 'For example, a current oil and gas investment conversion allows for 60 cents on the dollar in tax mitigation, meaning you're only taxed on 40% of the amount being rolled into the Roth IRA,' Bennett said. 'Typically, tax mitigation for these types of conversions is around 42 cents on the dollar. Once converted, the funds grow tax-free, and if specific conditions are met, withdrawals in retirement are also tax-free.' State income taxes are often applicable for Roth conversions, depending on where you live. Your location can greatly affect your ordinary income as well as your earned income. For example, Bennett said Florida and Texas don't impose state income taxes, while California or New York can impose significant state income taxes on conversions. 'It's crucial to understand your state's tax policies and factor them into your planning,' Bennett said. 'If you're planning to relocate to a no-tax state, consider postponing the conversion until after the move to maximize savings.' The bottom line is that whether it is stocks, bonds or even a retirement account, investing involves risks. However, when it comes to your tax situation there are ways to escape penalty-free, or at least lower your tax liability. If you are age 50 or older and are considering converting your traditional IRA to a Roth IRA, make sure you understand the tax rules that will help make that transition a smooth, and more affordable, one. Caitlyn Moorhead contributed to the reporting for this article. More From GOBankingRates 5 Types of Vehicles Retirees Should Stay Away From Buying 5 Cities You Need To Consider If You're Retiring in 2025 4 Things You Should Do if You Want To Retire Early 10 Cars That Outlast the Average Vehicle This article originally appeared on Tax Day Countdown: 4 Tax Rules To Know Before Converting Your IRA Account Sign in to access your portfolio
Yahoo
10-03-2025
- Business
- Yahoo
6 Strategies Millennials Are Using in 2025 To Shield Their Wallets From Inflation
Inflation has driven the cost of U.S. goods and services up 23% since early 2020, according to the Bureau of Labor Statistics. Be Aware: Read Next: Millennials have felt that pinch all too much. In their prime family-rearing years, millennials have struggled to balance their careers with finding a mate, buying a first home, raising young children and often caring for aging parents. So how have they shielded their finances from inflation, in the midst of all that? A decade ago, many felt that millennials came off as petulant children, insulted by the notion that they should budget and invest rather than indulging in every avocado toast or pumpkin spice latte that struck their fancy. Whether or not that was true, they've grown up quite a bit since then. They've had to. 'Millennials have become more intentional about their budgets,' said Jordan Mangaliman, owner of Goldline Financial Services. 'They've learned how to cut discretionary expenses when necessary.' Learn More: Credit cards can mask the effects of inflation — until the bill comes due. Emilia White of financial planning service Armstrong, Fleming & Moore pointed out that millennials have learned that lesson, often the hard way. 'Loose spending habits on the back of hot inflation and high-interest credit creates an ever-deepening hole that some borrowers will struggle to escape even after inflation has calmed.' While millennials still carry a high average credit card balance of $6,642, they owe lower balances than Gen Xers and baby boomers, according to a study by Experian. Millennials have seen firsthand how owning a home helps hedge against inflation, as rents and home prices alike soared after the COVID-19 pandemic. Indeed, millennials make up the largest portion of homebuyers in the market, according to National Association of Realtors. 'Sure, taxes and insurance will still go up,' said Kevin Leibowitz of Grayton Mortgage. 'But the largest portion of your housing costs stay locked despite inflation, if you borrow a fixed-rate mortgage.' In fact, financial expert Lucas Barcelo has seen many millennials get scrappy to buy homes even in an expensive housing market. 'They make it work, even if it means getting creative with house hacking or renting out rooms or units on Airbnb.' Seeing just how inflation-resilient real estate is, some millennials have gone beyond their own homes and added it to their investment portfolios. 'Many millennials have turned to real estate investments that pay them cash flow,' said Mangaliman. 'Real estate appreciation, paired with the rising cost of rent, has proven itself as a way to outpace inflation.' Sometimes that means buying rental properties directly. Other millennials have discovered passive real estate investments, such as REITs and real estate syndications — which don't come with all the headaches of landlording. Erika Kullberg, the personal finance expert behind picked up that thread: 'Millennials are leaning into assets that typically outpace inflation, such as stocks and real estate. In particular, they like index funds and dividend stocks for long-term planning.' Sure enough, millennials have outpaced other generations in buying up index funds. A survey by FTSE Russell found that 45% of millennials own these passive stock funds, compared with 42% of Gen Xers and 34% of baby boomers. Budgeting helps, but you can also approach the problem from the other direction: by earning more money. 'We have seen the biggest rise in side hustles among millennials,' said Barcelo. 'They're less about grinding 24/7 and more about finding fun ways to make extra money without burning out.' That helps when prices rise faster than your W-2 paycheck. Ultimately, millennials have simply found ways to make it all work. They combine these strategies to stay afloat, even when the floodwaters of inflation and economic uncertainty rise. More From GOBankingRatesHow Paychecks Would Look in Each State If Trump Dropped Federal Income Tax25 Places To Buy a Home If You Want It To Gain Value This article originally appeared on 6 Strategies Millennials Are Using in 2025 To Shield Their Wallets From Inflation Sign in to access your portfolio
