What Happens When You Cross Into a Higher Tax Bracket

By Alec Sunners, CFP®, Wealth Advisor

We’ve all heard the myth that crossing into a higher tax bracket means every dollar you earn suddenly gets taxed at that higher rate. But that’s not how it works.

In this video, we review what actually happens when your income crosses into a new tax bracket, why marginal tax rates are your friend, and how to use strategic planning to keep more of your hard-earned money.

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Transcript

“I don’t want the bonus. It could push me into the next tax bracket.” I heard some version of that sentence over and over this past tax season.

The belief behind it is wrong, and people who act on it often walk away from real money. I’m Alec Sunners, a wealth advisor here at Consulate Wealth. In this video, I’ll explain what actually happens to your taxes when you cross into a higher bracket.

I’m using 2026 numbers, so the next time a bonus or a raise comes along, you’ll know exactly what it costs you.

Does Crossing Into a Higher Tax Bracket Raise the Tax on All Your Income?

Here’s a picture most people have. You earn a little too much, you cross a line, and suddenly all of your income gets taxed at a higher rate. A raise or bonus ends up costing you money.

The word bracket makes that sound right. It sounds like a bucket you fall into. Once you’re in the 22% bucket, everything you earn is 22%.

Why the 22% Withheld From a Bonus Isn’t Your Tax Bill

The pay stub reinforces it too. When you get a bonus, your employer will withhold a flat 22% for federal taxes. You see a big chunk disappear and think, “See? They’re taxing me at 22%.” But that withholding isn’t your actual tax. It’s just a placeholder, and any extra gets sorted out when you file.

How Marginal Tax Brackets Work, Using a Hypothetical Example

So let’s look at how it really works. Let me use an example. The couple I’m describing is hypothetical. They’re not real clients.

First, a quick definition. Taxable income is not your salary. It’s what’s left after deductions. For 2026, a married couple filing jointly gets a $32,200 standard deduction. So a couple earning about $127,000 has roughly $95,000 in taxable income.

2026 Federal Tax Brackets for Married Couples Filing Jointly

Now, the 2026 brackets for married couples filing jointly: it’s 10% on the first $24,800. 12% from there up to $100,800. 22% from there up to $211,400. And so on.

The key idea is that each rate applies only to the dollars inside its slice, like a staircase. You don’t jump to a new floor and get charged for the whole building.

How Much Federal Tax Does a $20,000 Bonus Cost?

Our couple has $95,000 of taxable income, and now they get a $20,000 bonus. That brings them to $115,000. The 22% bracket starts at $100,800. So the first $5,800 of the bonus fills up the rest of that 12% bracket. Only the remaining $14,200 is taxed at 22%.

So do the math, and the bonus costs about $3,800 in federal tax. That’s roughly 19% of the bonus. They keep over $16,000.

The Tax Bracket Myth vs. the Real Tax Bill

Now, compare that to what the myth predicts. If crossing the line really meant everything was taxed at 22%, their total tax would be around $25,000. The real number is about $14,700. The myth overstates their tax bill by more than $10,000.

Crossing into a higher bracket never reduces your take-home pay. Only the dollars above the line are taxed at the higher rate, and you always keep the rest.

What the Tax Bracket Myth Costs People

So what does this misunderstanding actually cost people? The first cost is the obvious one; turning down extra income. Bonuses, overtime, a side project. People pass on real money to avoid a tax that doesn’t exist.

Why Fear of a Higher Bracket Can Mean Skipped Roth Conversions

The second one is quieter, and it’s a big deal for people nearing retirement. Many people skip Roth conversions in the lower income years before required minimum distributions begin. These years can be a great window to move money from a pre-tax account to a Roth at relatively low rates. But if you’re afraid of jumping a bracket, you leave that window unused. Later, forced withdrawals can push you into higher brackets anyway.

What Is Medicare IRMAA?

That said, there is one place where going a single dollar over a line really does hurt. It’s called IRMAA, the income-related monthly adjustment amount. In plain English, it’s a surcharge on your Medicare Part B and Part D premiums if your income is above certain thresholds.

How IRMAA Is Different From a Tax Bracket

It’s measured differently than a tax bracket. IRMAA looks at your modified adjusted gross income. That’s your adjusted gross income plus things like tax-exempt interest. It’s calculated before your standard deduction, so it’s a higher number than taxable income.

And unlike tax brackets, IRMAA works like a cliff. For 2026, the first line for a married couple is $218,000. Go over one dollar, and that surcharge applies to the whole year. For a couple on Medicare, that’s almost $2,300 in extra premiums.

The IRMAA Two-Year Lookback and Roth Conversions

There’s also a two-year look-back. Your 2026 premiums are based on your 2024 tax return, so income you report today can affect your Medicare costs two years from now. That’s why we size Roth conversions with IRMAA in mind. Sometimes it makes sense to convert right up to the line, but not over it. Sometimes it makes sense to spread the conversion across several years.

Planning Your Retirement Income a Year or Two Ahead

So let’s go back to the person who didn’t want the bonus. The tax they were afraid of was never going to happen. The lines that can cost you are real, though, and they’re a lot easier to plan around when someone’s looking at your income a year or two ahead. Nearly half of our advisors here at Consulate Wealth are also CPAs, so your tax questions and your retirement plan get answered by the same team in the same meeting.

If you’re within a few years of retirement and want a second set of eyes on your income plan, reach out to our team at (410) 823-7283, or go to our website to schedule a time to talk. I’m Alec Sunners here at Consulate Wealth. Thanks for watching.

Frequently Asked Questions

If I move into a higher tax bracket, does all my income get taxed at the higher rate?

No. Federal income tax brackets are marginal, meaning only the dollars above a bracket threshold are taxed at the higher rate. In 2026, a married couple filing jointly with $220,000 of taxable income pays the 24% rate on only the $8,600 above $211,400. The income below that amount is still taxed at the applicable 10%, 12%, and 22% rates. Our tax planning team runs these numbers before any big income decision.

Should I do a Roth conversion if it puts me in a higher tax bracket?

Possibly. Moving into a higher federal tax bracket does not mean your entire income is taxed at that higher rate; only the portion of taxable income above the bracket threshold is. For many retirees, the years after their final paycheck and before required minimum distributions begin can create a lower-income window for Roth conversions.

The right conversion amount depends on more than the top of your current federal tax bracket. It should also account for Medicare IRMAA thresholds, state taxes, Social Security taxation, available deductions, and how you will pay the tax on the conversion. A coordinated projection can help determine whether converting now may reduce lifetime taxes.

What income level makes Medicare premiums go up in 2026?

For 2026, Medicare generally uses the modified adjusted gross income reported on your 2024 federal tax return to determine whether you owe an income-related monthly adjustment amount, or IRMAA. For most individual filers, IRMAA begins above $109,000 of 2024 MAGI; for married couples filing jointly, it begins above $218,000.

Crossing an IRMAA threshold by even $1 can move you into a higher surcharge tier. In the first 2026 tier, the added monthly amount is $81.20 for Part B plus $14.50 for Part D–$95.70 per month per person if you are enrolled in both. Your actual result can differ based on filing status, Medicare coverage, and certain qualifying life-changing events.

At Consulate Wealth, advisors who are also CPAs check these lines before recommending a Roth conversion.