Myth 1: A Raise Can Push Me Into a Higher Bracket and Cost Me Money
Reality: Only the income above the bracket threshold is taxed at the higher rate. Moving into the 22% bracket doesn’t tax all your income at 22% — only the portion above the threshold. A raise never, under any circumstances, results in less take-home pay. Only the marginal dollars are taxed at the higher rate.
Myth 2: A Big Tax Refund Is a Good Thing
Reality: A $3,000 refund means you over-withheld by $250/month. You gave the IRS an interest-free loan for 12 months. If you’d invested that $250/month at 7% instead, you’d have $3,043 + $143 in earnings = $3,186 instead of $3,000. The optimal tax situation is owing a small amount — not a large refund.
Myth 3: All Retirement Account Contributions Reduce My Taxes
Reality: Roth IRA and Roth 401k contributions do NOT reduce current taxable income. Only Traditional (pre-tax) contributions reduce AGI. Roth contributions are made after tax — the tax benefit comes later (tax-free withdrawals), not now.
At $100,000 taxable income (22% bracket, threshold at $48,475 single): receive a $5,000 raise to $105,000. Only the $5,000 above the prior top of your income is taxed at... wait — you’re still in the 22% bracket at $105,000. Even if a raise pushed you from 22% to 24%, only the amount above the 24% threshold ($103,350 for single) is taxed at 24%. Marginal brackets never result in earning less after a raise.
Myth 4: Filing an Extension Gives You More Time to Pay
Reality: Form 4868 grants a 6-month extension to FILE, not to PAY. Tax still must be paid (estimated) by April 15, or you face late-payment penalties (0.5% per month). The extension prevents late-filing penalties but not late-payment penalties.
Myth 5: Self-Employed People Always Pay More in Taxes
Reality: Self-employed individuals pay self-employment tax (15.3% vs. 7.65% for W-2 employees) but also have access to deductions W-2 employees cannot claim: home office, business vehicle, business meals (50%), self-employed health insurance (100%), and much larger retirement account limits. Net tax burden for a well-optimized self-employed person can actually be lower than an equivalently-earning W-2 employee.
Test the Myths Against Your Real Numbers
Enter your income and see your actual tax calculation — the math clears up the common misconceptions.