[USER]

I’m in my early 30s and just received a promotion. While very exciting, I’m quite concerned about the tax liability that may come along with it.

• Salary: $140k base + $14k bonus annually
• SINK (Will probably get married but don’t want kids)
• Location: Indiana
• Debt: $0
• Net worth: $135k. Spent years focusing on debt payoff, hence the low net worth. Didn’t get the six figure salary until 2022.
• Annual Expenses: <$25k/yr.
• I don’t own any real estate.

I max out my 401k, HSA, & IRA. My plan is to beef up my brokerage contributions ($3k-$4k/month) to bridge the gap between early retirement & 59.5. Any tips on how I can avoid a massive tax bill when I file next year?

[Stan]

The more you make the more you essentially pay. If you are taking advantage of all tax deferred options (401k, HSA, etc) and unless you are self employed and have some business expenses to offset gains then you will pay taxes.

The question is are you having enough withholding so you don’t get “hit with a massive tax bill”.

Then invest the rest in taxable brokerage account, etc and play the long ball game.

Invest repeatedly and live on less than you make.

The more you invest in low cost index funds and stay out of debt the quicker the snowball and you start compounding your net worth and liquid assets to get to FI.

You are in your early 30’s so do that for 15-20 years and you’ll be fine in early 50’s with lots of options to choose from – work, work less, retire, etc.

[Trevis]

As long as that 401k is traditional, you’re probably doing the best you can. I don’t think that an IRA would be tax deductible at that income level.

That said you may also be in backdoor Roth territory (I don’t remember the limits for single).

[Mario]

Maybe you can clarify this but what specifically are you worried about?

Your effective tax rate is unlikely to change very much. It sounds like you’re a W2 employee so taxes will be withheld and you were already making six figures in 2022 so, given the progressive tax system, you may end up paying a slightly higher tax rate on a tiny portion of your income.

You’re not likely to end up with any massive tax bill.

Don’t miss: How much trouble would you go to in order to be able to do a backdoor Roth without inducing pro-rata tax?

[Robert]

If you’re looking to taking any educational classes in the future, I would look into 529 for yourself. Indiana has the best 529 tax benefits in the country.

[Andrew]

It’s better to make more money and pay more taxes then make less money and pay less taxes.

[Eric]

You shouldn’t take much of a tax hit. You’ll be in the 24% tax bracket for income above $100,525. But that 24% won’t apply to all of your income.

Just the income above that threshold.

Assuming you make $154k as expected, your effective tax rate will be 17.21%.

Have you seen: How do I choose the best ERC company for tax credit assistance?

[Liz]

Why would you have a massive tax bill? What misunderstanding are we correcting here?

Because your withholdings should change to match your new income.

[Kyle]

this might be a question born from a misunderstanding of the tax brackets. Your higher income pushing you into a higher bracket does not mean all the income is taxed at that new incremental rate. you fill up each tax bracket.

Your tax withholding will be adjusted for your new payroll amount so that it approximates your effective tax rate each paycheck.

[Sophie]

If you are on a W2, the taxes will already be taken out of your paychecks, so you really won’t be hit with a massive tax bill when you file. Probably close $0.

[Jake]

When you’re clearing $500k in W2 then you can complain about massive tax bills. Until then, think of it this way.. paying more tax is good.

Means you’re making more money.

[Alice]

You’re already maximising contributions in your IRA, but may want to consider putting a portion of your contribution into a traditional IRA and another portion into a Roth IRA.Contributions to a traditional IRA reduce your current taxable income, while contributions to a Roth IRA are tax-free in the future.

[John]

Can you please share with us why you think you’ll have a massive tax bill?

Something tells me that: (a) You don’t know that your taxes will be taken out of your salary and bonus checks directly, and/or (b) You don’t realize that being in a higher tax bracket doesn’t mean ALL your income gets taxed at that new rate. The ‘lesser’ parts of your income that get taxed at the lower rates.

The highest bracket only taxes the amounts OVER a certain amount.

Take a peek at: Can someone explain to me the pros/cons of buying or leasing vehicles for business tax purposes?

[Logan]

Once you get over 168K, they quit taking out social security, so you taxes go down after this point for a time. If you don’t want to pay more taxes, then don’t make more. You’re at 24% until 191K anyway.

[Russell]

There will never be a chance where a raise causes you to lose income because you are taxed more.

Tax brackets don’t work that way.

[John]

Not sure I’m following, why would you have a massive tax bill?

Also I don’t see monthly rent amount anywhere and I’m sure it’s not part of the $25k yearly expenses number.

[David]

Tax rates are marginal. When you cross into to next bracket, only the amount that falls into tgat bracket is taxed at the higher rate. Example lets say the 24% bracket starts at $95,000 and you make $130,000. That doesn’t mean all of your $130,000 gets taxed at 24%. The first $95,000 gets taxed at the lower rates, only the dollars at $95,001 and up get taxed at 24%.

Your tax bill isn’t going up that much. You were already in the 24% bracket and your new higher income still is in the 24% bracket. Congrats on the promotion.

Worth a look: What are capital gains tax implications when downsizing home? Owned for 26 years

[Patrick]

Can I ask what the concern for taxes is in your mind?

With TCJA ending end of next year you’re likely paying the lowest taxes you’ll ever pay!

You’d have to deduct around 40k to get from 24 to 22% brackets.

[Author]

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