Save money by getting into a lower tax bracket?

All my life I've heard that one could save money by getting into a lower tax bracket?

Here's an old example, from Wikip, from the 1930's:

"Benny Thau was trusted by the stars. For example, Greta Garbo never had a formal contract with MGM. The director and producer Gottfried Reinhardt recalled that at one time Thau explained to Garbo that if she accepted a sizable salary reduction she would move into a lower tax bracket and receive the same net pay. She understood the logic and agreed to the cut on a handshake.[7] "

I don't understand the logic. Do you?

Reply to
micky
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There is no logic and I suspect that Garbo and the source of the information, who claims to have been present at the meeting, were conned. There are a very few unusual situations in the current tax environment where marginal tax rates exceed 100% in small regions of taxable income, but they are rare.

Granted, in the case cited, we're talking about 1930s tax laws which were quite different. Using 1933 as an example, certain income up to $4K was taxed at 4%, the rest at 8%, but there was a surtax with a rate between 1 and 55%. Still, I don't see how the pay cut would be cash-retained neutral.

Ira Smilovitz

Reply to
ira smilovitz

Right. Going into a higher tax bracket means a higher percentage of tax for each additional dollar after the end of the prior bracket.

For example let's say the first $10,000 is taxed at 10% and up to $20,000 is taxed at 20%. Well, the first $10,000 is still taxed at

10%, and it's only the additional $10,000 that is taxed at 20%.

So unless there is a very unusual situation (such as the Alternative Minimum Tax), you will never come out ahead by recognizing less money or making a large expenditure solely for a tax break.

In the old days it used to be possible to buy capital assets at inflated prices, on credit with little down, using a non-recourse loan, and be able to depreciate the entire stated price. In those cases you could get more depreciation than you actually spent, so you could come out ahead.

But the IRS put an end to things like that quite some time ago.

Reply to
Stuart A. Bronstein

[...]

While not common, I wouldn't say "rare" either. In addition to regular tax and AMT, we now have a third independent tax system, Net Investment Income (NII) tax, with its own rates and exemptions/deductions. Plus, capital gains rates can be zero if the regular tax bracket is low enough, and capital losses can offset capital gains to a much greater extent than regular income. Lastly, state tax rates can vary considerably depending on which state and what category of income.

This means that income can end up being taxed much more favorably if you can shuffle it from one tax category (regular, AMT, NII, & state) to another. (For example, Incentive Stock Options held for LT cap gain treatment instead of ordinary wages). While I haven't worked out an example, it wouldn't surprise me if there are a number of scenarios where lower gross income might result in the same after tax amount as higher gross income, due to different tax rates for different categories of income. (Intuition says you would receive a lower after tax amount from lower gross income).

If we bring tax credits into the discussion, then it's real easy to see the counter-intuitive result, since many credits are phased out at higher AGI.

Back to the OP - if you read the footnote at Wikipedia, you'll find that there is no evidence that what Garbo was told was actually true, merely that she believed it. Anyway, if it was true and the result of lower gross pay was the same net after-tax pay to her, then what would be her incentive to go along with the scheme? Sure the studio would need to share some of the total tax savings with her to make it worthwhile for both parties to participate.

For a movie star, I suspect the deals they make regarding straight salary vs. future royalties are often structured with tax effects in mind, but I am hardly an expert on how the movie industry works.

Reply to
Mark Bole

Also, let's not forget the other taxes (i.e. State) as well as the various non tax taxes and benefits.

The classic example of this would be (numbers fo illustration) being eligible for Medicaid when making $9,500, but losing that assistance at $10,000.

Hence if you're at that income level, an extra hundred dollars will cost you plenty.

I recall that in NYS there was a period in which the State tax had the standard step ups as your income increased, BUT the higher tax rate applied to your _entire_ income, not just the marginal numbers. So (again, numbers made up) if the rate was five percent up to $100,000 in income, but went to ten percent if over $100k, that bigger hit would start at the _first_ dollar.

So... if you were at $99k, you were very careful to NOT get pushed into the $100k bracket.

Reply to
danny burstein

Wow. That's terrible and a real disincetive. In fact since you don't know in advance how much you will make by tthe end of the year, you have to back off early, and make even less. Or lie on your taxes. I'm sure some people felt justified.

Maybe that is where t he widespread idea started, since so many tv shows are written in NYC.

Sorry it's taken me 5 years to reply. I had to think about what you all wrote.

Reply to
micky

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