Brad Hudson wrote:Here's the problem: you are taking an infrequent example of unfairness -- an individual who works overtime and happens to cross a tax bracket...
I think "infrequent" is too mild a word to describe this outcome. This exact scenario is probably so rare that it actually plays out next to never in real life. Here's everything that would have to come together for this scenario:
1. An employee would have to be paid hourly instead of being salaried.
2. The employee must be offered overtime work by his/her employer.
3. He/she must be making an amount right at or just under a bracket boundary (17850, 72500, 146400, 223050, 398350, and 450000 for married filing jointly) before any overtime work and after all deductions and exemptions.
Even with all these lining up perfectly, the actual dollar impact is pretty minimal. Let's take the bracket boundary with the biggest jump and do the numbers. Say we have a married hourly worker whose taxable income is $75500 for this year, but would have been $72500 if he had not worked any overtime. This puts him into the next tax bracket by $3000. All of his overtime earnings will be taxed at the higher rate.
His tax liability is as follows:
$1785 on the first $17850 (10% bracket portion)
$8198 on the next $54650 (15% bracket portion)
$750 on the final $3000 (25% bracket portion)
--------
$10733 total tax due
If he had not jumped into the next bracket, his tax would have been $10433. The end result of overlapping into the next tax bracket is an increased tax of $300 on his adjusted income of $75500. That amounts to 8 1/2 hours worth of take-home income for this person.
I would find it strange if paying $300 additional tax on an additional $3000 (after exemptions) created a real disincentive to not work overtime.