Marginal vs effective rate
The most common misunderstanding in personal finance: people believe moving into a higher bracket taxes ALL their income at the higher rate, and turn down raises because of it.
How it actually works: income is sliced. The first slice is taxed at the lowest rate, the next slice at the next rate, and so on. A raise is only taxed at the higher rate on the portion above the threshold.
Two numbers to keep straight:
• Marginal rate — what your NEXT dollar is taxed at. This drives decisions: deductions, Roth vs Traditional, harvesting.
• Effective rate — total tax divided by total income. Always lower. This describes what you actually paid.
You can never lose money by earning more through brackets alone. Benefit phase-outs and credit cliffs are a separate matter and can genuinely bite.
Chart: income sliced by bracket.