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Comment by Humdeee | Hacker News Reader

Financial literacy is pure garlic to every common vampire financial advisor.

I have a couple friends right now that do not want wage raises because "it will knock them into the next tax bracket". Believe me, I've tried to explain how the simple concept of income and taxes work.

I trusted my financial advisor years ago when I started my career. It took me a couple years to realize I was the product, not his client with his best interest in mind. Strangers, especially from more disciplined subs and without skin in the (your own) game, have been more valuable many, many times over.

Everyone who takes what is said literally and in verbatim would be a fool. Validate what is said as it applies within your own context.

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Dunno about the US, but in the UK there are a few wage points where a small rise can lead to a reduction in net income. Specifically moving into the higher tax bracket, which removes £200 off their personal allowance if they were using the pooling allowance option -- i.e. a £100 tax rise could lead to £46 extra income but £201 extra outgoing, a net reduction of £155

There are more perverse options with housing, childcare and income benefits being removed which I believe can lead to a negative income.

In the US the Benefit Cliff is real:

"There is this issue of the benefits cliffs, where some programs are designed so just a very marginal increase in earnings can result in a loss of a very important benefit. And a lot of states, unfortunately, have structured their childcare subsidies programs that way," explains Skinner.

"Typically, pay rises, income rises, but at some point you lose eligibility for a subsidies all together and it's an abrupt reduction in that family's resources," Skinner says.

https://www.theguardian.com/money/2014/jul/20/benefits-cliff...

Does the US not have marginal tax brackets? That seems really odd and dumb. The benefit cliff you cite is real, but for actual income taxes, there's no such thing as a reduction in income from higher earnings. Going to a higher tax bracket just means you pay higher taxes on money over a certain threshold. So if bracket A is 20% under $50k, and bracket B is 30% over $50k, if you make $51k, you'll pay 20% of 50k, plus 30% of 1k. It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects).

Strangely, a lot of people don't understand this at all.

As far as I know, the US tax system works the way you describe.

The Netherlands has this issue as well, points of income where your marginal gain is negative, ergo losing net money when making more gross money due to losing benefits. There are also indirect problems such as losing access to certain services (cheaper housing being one). Obviously, this shouldn't be the case. Making more money gross should result in equal-or-more money net, without disadvantages, otherwise the incentive is gone.

The first table (image) in this post https://gathering.tweakers.net/forum/list_messages/1735517 shows this issue.

It's in Dutch, but the most important columns are the first (gross income), the second to last (net income, including benefits) and the last (effective tax rate on the 1000 gross income increase).

Note the last column tells us that making 1000 gross extra will increase your net income about 100 between 32K and 31K gross income. Going from 31K to 32K will even make you lose money.

Marginal tax brackets yes, but there are also benefits that you lose access to based on income. The linked article is about food stamps, but imagine something like subsidized health insurance for people making under $50,000. Going from $49,999 to $50,0000 is much more costly than the taxes you paid on that dollar.

There are special benefits provided for those under low incomes in many jurisdictions. If you go from $24,999 to $25,000 you may see some supplemental food income benefits go from $400 a month to $200 a month (not an actual example- but you get the idea). Generally though, these cases are not common and are really overstated as a problem IMHO. They also tend to overlook that its far more beneficial to take the raise and whatever temporary setback that might come with it to move yourself up the wage scales.

Why it comes up in these discussions as something meaningful always confuses me. To me its akin to explaining to someone that squirrels are not harmful to humans and we should not walk around terrified of them and having someone come by and say "but actually, they could have rabies...." I mean, you aren't wrong, but you are essentially spreading misinformation by implying that this is common instead of exceedingly rare and something people should be wary of as they walk down the street every day. Its the exact type of misinformation that politicians use to make disingenuous arguments to steer people into supporting their policies, and the HN crowd should be above that IMHO.

US does have marginal tax brackets. There is the benefit cliff. But there are also tax credits that phase out progressively with higher incomes. Though I doubt, but don't know, than any of those produce net negatives. They may be closer to net neutral.

The OP was describing the same thing as you. People don't understand marginal tax brackets and do silly things like not want raises for tax reasons.

> It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects)

It's never disadvantageous except when it is? That sound like the classic anchorman citation: 60% of the time, it works every time

Sure your tax bracket won't directly means less returns, but switching from a tax bracket to another may means having access to less benefits, which may means a higher effective tax rates.

I just saw that I was downvoted... I have no idea what's wrong with my comment. That downvote button should definitely force to comment and explain why you downvote.

Think of it another way. This statement:

> It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects).

is essentially equivalent to:

> If you're not on government benefits, where there are some weird effects, then it is never disadvantageous to make more money.

But if the wording was done the second way, you probably wouldn't have had a problem with it.

Thanks for the input, you do bring an excellent point. I wouldn't agree that they are equivalent though, one is formed specifically to give the impression that it's never disadvantageous, while the other isn't. Parentheses aren't used to bring essential information, which in this case, it is essential.

This is why I would have less problem with the second one. I would still precise that some of theses benefits aren't really a choice, they are tax break that just happens to be offered because of your income, so sure if you already went beyond that income, you aren't on that government benefit... but at one point you weren't beyond that income and you did made less money once you went beyond.

In addition to the benefits stuff listed here, you can also go backwards on income due to the Earned Income Tax Credit cutoff.

The benefit cliff affects one demographic, and while affecting net revenues, isn't a tax issue. Software engineers fretting about moving into a higher tax bracket is another demographic, and is a tax issue.

These are different phenomena, generally affecting different people. While (a hypothetical I) could certainly lose out his social security medicaid by going from $0 income to non-0$ income, I'm not the person worried about going from the <80k$ bracket to the >80k$ bracket.

IME, the people who worry about making more money and moving into a new tax bracket are not people who are eligible for any meaningful subsidies to begin with.

I've always been a bit sceptical of things like a citizen's income, but a negative income tax instead of things like universal credit seems to be quite an elegant solution to dealing with benefit cliffs.

This picture show the benefit cliffs in a very clear way: https://sacredcowchips.files.wordpress.com/2015/08/welfare-c...

Most important part of that picture: "The single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income & benefits of $57,045."

That's shocking - so much for "one specific demographic", when it affects people earning over twice the median wage.

Quite.

I considered going into financial advisement once, in the distant past. A family friend was in the field, and took me in for a round of advice. He was quite open that it was eat-what-you-kill, with a serious focus on people with impaired judgement (e.g., elderly), because that was the only way to make up the bulk of your revenue. He said that he hadn't had a peaceful night's sleep since he'd started, due to the guilt of day-to-day work.

Almost all "financial advisors" are really just in sales.

Correct, and developing trust is a fundamental tool in every salesman's pocket.

In the UK (and, AFAIK, across the EU) we have IFAs (Idependent Financial Advisors) who follow rules, such that they are nit permitted to get kickbacks from investments. Does such a thing not exist in the US?

In the US we have "Fee-Only Financial Advisors": https://www.forbes.com/sites/davidmarotta/2012/06/11/fee-onl...

In Canada we have fiduciaries, but most people aren't that financially literate. If you walk into a bank and ask for a financial advisor they're just going to pass you to a sales rep. Enjoy your TD e-Series!

(Although, admittedly, mutual fund MERs have dropped substantially with the rise of low-cost ETFs...)

> Believe me, I've tried to explain how the simple concept of income and taxes work.

If you want to give it another shot, this article and video from Vox is pretty good:

* https://www.vox.com/policy-and-politics/2019/1/7/18171975/ta...

I'm right at the cusp of Roth IRA contributions being taken away. If I were angling for a raise, I would make sure I made just under the limit for this year (old salary and new salary combined in proportion to time worked under each) and try to negotiate for more time off. That's about the only time I would forgot a wage raise and it would probably only be worth it for a band of 3000 around that limit.

You might want to look into a backdoor Roth contribution

> I have a couple friends right now that do not want wage raises because "it will knock them into the next tax bracket".

is that not a real thing where you live?

I think it's more that getting knocked into the next tax bracket is better than making less money. Because you inherently still make more money due to how tax brackets works. I'm guessing this is an allusion to how many people don't understand how tax brackets work and think that you can make more money, get taxed more, and then end up with less than if you never made more money.

Tax brackets do, but what I was insinuating is that those select friends (bless their heart) believe that all of your income is taxed in the highest singular bracket that you reach.

So many people don't understand how tax brackets actually work. They think if they make one more dollar they pay X% more tax on every single dollar they earned.

It's actually terrifying to me how little understanding the average person has of finance.

It isn't that black and white. For example, in Canada, I can contribute a certain amount into a tax-free savings account each year.

TFSAs can be created to hold ETFs, Mutual Funds and other types of investments. I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500. I can contribute more annually as long as my total is under $69.5k.

With a raise, I can accelerate my contributions and continue to enjoy tax-free gains on it. My personal average income tax rate might go up, but that's offset to an extent by whatever returns I'm making through my portfolio.

No, that's not how it works. It is a marginal tax bracket. If you get in the higher bracket, it's only the new money that gets taxed at the higher rate, not your full salary.

It has absolutely nothing to do with your contribution to retirement accounts. You can invest more and contribute more to your tax free retirement accounts with a higher salary (up to a point) but even if you didn't, that wouldn't make a difference.

I'm aware of how marginal tax rates are applied. That's why I said "while my average tax rate may increase" (in a hypothetical situation), I can still net more overall due to increase in the absolute $ return on the TFSA portfolio.

I'm responding with respect to the OP's comment about beign bumped into a higher marginal tax bracket. Just because you are, doesn't mean you'll automatically end up with less discretionary income.

I feel like I'm misreading this, but regardless of whatever investments you have, you'd come out with more as your income increases into higher marginal tax brackets correct? As in, if I was making 94k and got a raise to 98k, I'd come out with more regardless of what's in my TFSA.

I thought the point of contributing more to the tax free account was to lower the total taxable income? Same with making charitable contributions.

Just want to be clear on this point:

> I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500

As of 2020, the total you can contribute into a TFSA over your lifetime is $69500. But it's not a limit of what can exist in your account. Gains you make in the account do not count toward your limit.

Yes, I should have clarified that it's the total contribution that maxes out at $69.5k

I feel like the widespread misunderstanding of tax brackets is used as a weapon.

Candidate X wants to tax you 60%!

It absolutely is. See also: the "death tax" in the US. I 100% guarantee you that the number of people who think they're subject to it exceed the number who are by at the very least 10x.

Absolutely. Case in point, I present to you Charlie Kirk, founder and president of Turning Point USA:

https://twitter.com/charliekirk11/status/1231005642413858816

"Facts:

Bernie wants a $15 minimum wage

That would mean a gross salary of $31,200 for a 40 hr. work week

But he wants to tax anyone making above $29,000 a year 52%

That would make gross salary $14,976—$288/week

$288 divided by a 40 hour work week—$7.20/hour

Socialism Sucks."

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