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View Diary: According to USA Today's logic, you should ask your boss for a pay cut (122 comments)

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  •  Most of the larger ones, unfortunately... (3+ / 0-)

    The exact schedules vary -- but most of the standard 1040 long form itemizations (mortgage, charitable giving, certain instruments around pension/retirement savings) do start to unravel around $100k.

    The immediate territory after crossing into 100k land is pock-marked with landmines that actually can swing raises into the negative territory right around that threshold --- highly dependent on individual filings, circumstances and deductions, of course.

    As a general rule -- if you're under $100k, chances are supremely high that a raise is always a good thing so far as net income goes.  It's right at that dividing line between 5 and 6 figures that it might actually make sense to do the long math.

    USAToday's problem was really that they used a terribly crappy example.... if you're making less than the the national median, the raise is always a good thing.  It's almost always a good thing up to about $100,000.... which covers, well -- most of us.

    If you get to the point where a raise bumps you over $100,000 -- then it's an exercise worth going through....  

    At that point - the key question becomes one of itemization --- if you don't itemize, you can probably be safe in taking the raise.   If you do, however -- then you should definitely do the long math homework.

    Full Disclosure: I am an unpaid shill for every paranoid delusion that lurks under your bed - but more than willing to cash any checks sent my way

    by zonk on Tue Sep 06, 2011 at 02:28:29 PM PDT

    [ Parent ]

    •  Still not getting it. (0+ / 0-)

      Are you saying someone with $100,000 AGI less $20,000 allowable deductions leaving taxable income of $80,000 gets a raise to $101,000 and allowable deductions are reduced by $1,000 or more?

      •  Yes - (0+ / 0-)

        IRC Sec 68 is the big hammer -- if your AGI exceeds the "allowable amount" ($100K for joint filers, actually $50k for individuals... I thought this was higher so the example from USAToday is still too low to matter, but not quite as a bad as I thought), then deductions are reduced by the lesser of either:

        1) 3% of AGI over the applicable amount, or,

        2) 80% of the amount of allowable itemized deductions.

        There are also exemptions to this section -- medical expenses and I believe, certain theft, casualty, etc circumstances.

        Again, it's highly dependent on how and what you itemize - but if you have big ticket deductions, going over the "allowable amount" can have big ramifications.

        Full Disclosure: I am an unpaid shill for every paranoid delusion that lurks under your bed - but more than willing to cash any checks sent my way

        by zonk on Tue Sep 06, 2011 at 05:13:01 PM PDT

        [ Parent ]

        •  Would like to see a real example -- (0+ / 0-)

          -- the AGI limitation number I saw was approximately $168,000.  From my quick look at this, it seemed to be tackling tax subsidies for discretionary expense deductions that we're probably being abused.

          •  Abuse is the reason for the IRC Sec 68 (0+ / 0-)

            limits --

            in the example below around charitable giving, if you can afford to donate 50% of your AGI to charity at $49K -- then the chances are pretty darn good (but not absolute!  I know -- not directly, but just via reading about them -- some peace activists who truly do try to ensure that their income and taxes get to be such that they can honestly say they don't pay for defense spending... or anything else at the federal level, of course - but the conscientious objection to war leads them to ensure their tax bill comes out zero) that you're independently wealthy and your "paycheck" has little relation to your actual net worth.

            Again, though -- the "cracks" in the system generally occur right at those thresholds.

            If your income/AGI goes from $49,900 to $50,400 -- which is basically a 1% raise -- the equation for your deductions might very well change quite radically.

            In the year you were under 50K -- your deductions are limited only by the statutory limits of those deductions.... Once you cross over, your deductions are now limited by a formula that can be quite unforgiving.

            Full Disclosure: I am an unpaid shill for every paranoid delusion that lurks under your bed - but more than willing to cash any checks sent my way

            by zonk on Tue Sep 06, 2011 at 05:44:26 PM PDT

            [ Parent ]

    •  Your assertion could use an example (2+ / 0-)
      Recommended by:
      phonegery, Marie

      I crossed the 6 figure threshold and my income kept going up. I can't think of a single scenario where increasing gross income decreases net income, so I'd appreciate an example.

      •  It happens if you're collection Social Security. (0+ / 0-)

        Up to 85% of your Social Security benefit is taxable depending on your adjusted gross income amount on the 1040.  I think the tax starts kicking in at about 24K for someone filing single.

        Democrats - We represent America!

        by phonegery on Tue Sep 06, 2011 at 04:48:19 PM PDT

        [ Parent ]

      •  Below is a good one (1+ / 0-)
        Recommended by:

        But just for an easy -- if fairly implausible -- example, if you maxed your charitable contributions (50% is the limit, I think) -- you can fully itemize all of these deductions up to the limit.... until you cross the allowable income threshold ($100k for joint filers, $50k for individuals).  At that point, your deductions are limited per above/below.  

        At that allowable income threshold -- the IRC Sec 68 caps kick in which then limit those deductions to 3% of AGI over the allowable amount or 80% of max allowable deductions (whichever is the lesser amount).

        So - again, knowing this is a nonsense example - let's say your AGI is $49K... and being the charitable sort, you give a ton of your income to charity.

        Until you hit the "allowable amount" -- you can deduct up to 50% of your AGI (technically, 'contribution base' and AGI aren't necessarily the same thing, but let's pretend they are).

        Sooo... in 2010, you can itemize up to $24,500 in charitable contributions.

        In 2011, you get a 10% raise (again, we're playing fantasy here)... and suddenly, your AGI (filing single) has crossed the allowable amount.  It's now $54,000. Now - if you continue to be charitable - you can no longer straight away itemize that 50%.... Even though you now give ~$27k to charity, you're now limited to itemizing the lesser of 3% of AGI over the max (or 3% of that 4,000 that crossed you over the allowable amount threshold) OR 80% of the max itemized deduction limit (not gonna bother to look that one up).

        Of course -- if you're making just under or just over $50k -- chances are that you cannot afford to donate half to charity unless you're independently wealthy (hence the reason for the rules)....

        But the key is that once you cross certain thresholds, your deductions are suddenly subject to limitations that don't necessarily scale very well.  

        None of this will come out in your paycheck, of course -- I can't think of any scenario where your week-to-week paycheck actually falls -- but at the end of the year when you file your taxes, it's entirely possible your actual income could drop based on what happens with your deductions.

        Like I said - if you don't itemize, then none of this matters... but if you do -- it IS well worth doing the math when cross those IRC Sec 68 allowable amount threshold.

        Full Disclosure: I am an unpaid shill for every paranoid delusion that lurks under your bed - but more than willing to cash any checks sent my way

        by zonk on Tue Sep 06, 2011 at 05:34:06 PM PDT

        [ Parent ]

        •  Okay -- let's find that person (0+ / 0-)

          with $49,000 AGI and donates $24,500 that would be screwed with a 10% income increase.  That's the problem with implausible examples.  And lets not forget that those charitable contributions are being subsidized by taxpayers -- at a 15% rate, Pat Robertson gets $24,500 and the government $0 instead only $20,825 and the government getting $3,675.  However, that's really the sort of thing the legislation is going after.

        •  Thanks (0+ / 0-)

          Interesting subtleties. I wonder if there is a realistic scenario under which this could happen.

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