Making more money on your retro will not move you into a higher tax bracket that causes you to make less money.

Quick summary of how taxes work.

You’re taxed on marginal rates which means only the income within each bracket gets taxed at that rate. Meaning each tax bracket applies to you, just at different stages.

For example, say you make $60,000 a year and the next bracket kicks in at $60,000, taxed at 22% instead of 12%. If your retro pay bumps you up to $62,000, that extra $2,000 gets taxed at 22%, not your whole $62,000. Your first $60,000 is still taxed the exact same way it always was (which in this example is 12%).

So worst case, that extra $2,000 nets you maybe $1,560 after tax instead of the full $2,000. You’re still up $1,560. There’s no version of this where getting the retro pay leaves you with less money than not getting it by the time you file taxes.

Same goes for any raises you may get. Many fundamentally misunderstand how tax brackets work so wanted to share given the big conversation around retro and how it’ll be taxed…