Higher taxes when I work more to pay off debt...

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JB2013
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Higher taxes when I work more to pay off debt...

Post by JB2013 »

Hi all. I'm in the process of paying off some credit card debt due to a remodel that got into some unforenseen circumstances (as people warned us about). I have a regular 8-4 job that earns me a total of around $110 per year. I also have a side job that I can work basically whenever I want, and however much I want. Based upon my current earnings so far, I'm guessing I'll make around $35K for my side job, for a total income of about $145K this year.

I'm scheduled to work only two shifts per month with the side gig, but end up working an additional 15-20 hrs per pay period. I've come to realize this is really going to hit me hard with taxes as I'm trying to pay off the credit card debt which totals $7,500. Now, I get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off.

I made the decision to lower my 401K to only the match of 4% in order to increase my take home pay to pay down the debt. Previsouly I was contributing 21% and maxed out my 401K last yr which was around $750 per paycheck. Now I only deduct $154 for the 401K. A huge decrease! But in effect I'm then having to pay more taxes.

I looked at the 2021 Tax tables and if I keep the 401K at 4%, I would owe about $7,400 in taxes, which would mean I would have to pay $360 in taxes per paycheck. If I put the 401K at 20% to max it out for the year, my taxes go down to roughly $4,600, almost 3K less.

My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
Jags4186
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Re: Higher taxes when I work more to pay off debt...

Post by Jags4186 »

JB2013 wrote: Fri May 27, 2022 2:54 pm My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, [1] how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? [2] Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
1) Don't take on debt that you can't afford to pay back with what's left over after having maxed out your tax advantaged space
2) You will eventually be taxed on those contributions when you withdraw the funds. You're just deferring the taxes, you're not eliminating them

OP, when you take on debt you are doing so because you need cash that you either don't have, or it would cost you more to raise that cash then the cost of borrowing. You need to decide if it makes sense to continue maxing your tax advantaged space, and taking longer to pay back your debt with it's interest rate or, if it's cheaper in the long run to pay additional taxes now instead of additional finance charges.
Last edited by Jags4186 on Fri May 27, 2022 3:06 pm, edited 1 time in total.
exodusNH
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Re: Higher taxes when I work more to pay off debt...

Post by exodusNH »

JB2013 wrote: Fri May 27, 2022 2:54 pm Hi all. I'm in the process of paying off some credit card debt due to a remodel that got into some unforenseen circumstances (as people warned us about). I have a regular 8-4 job that earns me a total of around $110 per year. I also have a side job that I can work basically whenever I want, and however much I want. Based upon my current earnings so far, I'm guessing I'll make around $35K for my side job, for a total income of about $145K this year.

I'm scheduled to work only two shifts per month with the side gig, but end up working an additional 15-20 hrs per pay period. I've come to realize this is really going to hit me hard with taxes as I'm trying to pay off the credit card debt which totals $7,500. Now, I get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off.

I made the decision to lower my 401K to only the match of 4% in order to increase my take home pay to pay down the debt. Previsouly I was contributing 21% and maxed out my 401K last yr which was around $750 per paycheck. Now I only deduct $154 for the 401K. A huge decrease! But in effect I'm then having to pay more taxes.

I looked at the 2021 Tax tables and if I keep the 401K at 4%, I would owe about $7,400 in taxes, which would mean I would have to pay $360 in taxes per paycheck. If I put the 401K at 20% to max it out for the year, my taxes go down to roughly $4,600, almost 3K less.

My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
Taxes don't take more than 100% of your income. Even in the highest tax bracket + FICA, you would not pay more than 45%, and that would only be if you were earning more than $500k per year.

The problem is that your side gig is calculating taxes based in earning $35k per year, which is obviously far lower than your actual tax bracket of 24%.

You should ask that your side gig withhold more taxes. That way, you don't get the surprise at filing.

How much in interest are you paying? You need to factor that number against the additional taxes.

As someone pointed out while I was typing, you're not avoiding taxes on your 401k contributions. You're delaying them until some time in the future. And who knows, taxes might be substantially higher then. Historically, they were much higher. As the US ages and the working population declines, revenue for Social Security and Medicare is going to have to come from somewhere.
Topic Author
JB2013
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Re: Higher taxes when I work more to pay off debt...

Post by JB2013 »

Jags4186 wrote: Fri May 27, 2022 3:00 pm
JB2013 wrote: Fri May 27, 2022 2:54 pm My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, [1] how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? [2] Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
1) Don't take on debt that you can't afford to pay back with what's left over after having maxed out your tax advantaged space
2) You will eventually be taxed on those contributions when you withdraw the funds. You're just deferring the taxes, you're not eliminating them
So by point #2, are you suggesting don't max out the 401K and keep it at 4% to pay down the debt?
harikaried
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Re: Higher taxes when I work more to pay off debt...

Post by harikaried »

JB2013 wrote: Fri May 27, 2022 2:54 pmI get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off
Sounds like you've reduced 401k contributions to have more cash flow now to pay less credit card interest overall. You could then increase 401k contributions after July to get back to maxing the 401k if you have enough cash flow for other regular expenses?
Jags4186
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Re: Higher taxes when I work more to pay off debt...

Post by Jags4186 »

JB2013 wrote: Fri May 27, 2022 3:05 pm
Jags4186 wrote: Fri May 27, 2022 3:00 pm
JB2013 wrote: Fri May 27, 2022 2:54 pm My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, [1] how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? [2] Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
1) Don't take on debt that you can't afford to pay back with what's left over after having maxed out your tax advantaged space
2) You will eventually be taxed on those contributions when you withdraw the funds. You're just deferring the taxes, you're not eliminating them
So by point #2, are you suggesting don't max out the 401K and keep it at 4% to pay down the debt?
I edited my post above, but in case you missed it...

OP, when you take on debt you are doing so because you need cash that you either don't have, or it would cost you more to raise that cash then the cost of borrowing. You need to decide if it makes sense to continue maxing your tax advantaged space, and taking longer to pay back your debt along with interest or if it's cheaper in the long run to pay additional taxes now instead of additional finance charges.
sailaway
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Re: Higher taxes when I work more to pay off debt...

Post by sailaway »

You are conflating a few separate issues.

One is whether or not you are in a higher tax bracket for your higher income. Unless this make you ineligible for a tax credit or subsidy, you will still have more money than you would by not working the job, so the taxes are kind of irrelevant.

Separately is whether or not you are in a higher tax bracket due to contributing less to your 401k. You are going to pay those taxes now or later anyway.

How much is the interest on this debt? Might it not make sense to continue to max the 401k and pay off the debt a month or two later?
Topic Author
JB2013
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Re: Higher taxes when I work more to pay off debt...

Post by JB2013 »

exodusNH wrote: Fri May 27, 2022 3:05 pm
JB2013 wrote: Fri May 27, 2022 2:54 pm Hi all. I'm in the process of paying off some credit card debt due to a remodel that got into some unforenseen circumstances (as people warned us about). I have a regular 8-4 job that earns me a total of around $110 per year. I also have a side job that I can work basically whenever I want, and however much I want. Based upon my current earnings so far, I'm guessing I'll make around $35K for my side job, for a total income of about $145K this year.

I'm scheduled to work only two shifts per month with the side gig, but end up working an additional 15-20 hrs per pay period. I've come to realize this is really going to hit me hard with taxes as I'm trying to pay off the credit card debt which totals $7,500. Now, I get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off.

I made the decision to lower my 401K to only the match of 4% in order to increase my take home pay to pay down the debt. Previsouly I was contributing 21% and maxed out my 401K last yr which was around $750 per paycheck. Now I only deduct $154 for the 401K. A huge decrease! But in effect I'm then having to pay more taxes.

I looked at the 2021 Tax tables and if I keep the 401K at 4%, I would owe about $7,400 in taxes, which would mean I would have to pay $360 in taxes per paycheck. If I put the 401K at 20% to max it out for the year, my taxes go down to roughly $4,600, almost 3K less.

My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
Taxes don't take more than 100% of your income. Even in the highest tax bracket + FICA, you would not pay more than 45%, and that would only be if you were earning more than $500k per year.

The problem is that your side gig is calculating taxes based in earning $35k per year, which is obviously far lower than your actual tax bracket of 24%.

You should ask that your side gig withhold more taxes. That way, you don't get the surprise at filing.

How much in interest are you paying? You need to factor that number against the additional taxes.

As someone pointed out while I was typing, you're not avoiding taxes on your 401k contributions. You're delaying them until some time in the future. And who knows, taxes might be substantially higher then. Historically, they were much higher. As the US ages and the working population declines, revenue for Social Security and Medicare is going to have to come from somewhere.
Well, I treat both paychecks as one, so I just with hold more taxes on my primary job. I did the math and I would have to take around $360 per paycheck if I keep my 401K percentage at 4% to give the best guess to stay even on taxes owed at the end of the year. It's challenging because I can't predict how much that side job will for sure earn.

The interest on the card is around 16%. I've been charged around $55 the past several months for holding a balance, which hopefully if the roof doesn't collapse it will be fully paid off.
Topic Author
JB2013
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Re: Higher taxes when I work more to pay off debt...

Post by JB2013 »

sailaway wrote: Fri May 27, 2022 3:10 pm You are conflating a few separate issues.

One is whether or not you are in a higher tax bracket for your higher income. Unless this make you ineligible for a tax credit or subsidy, you will still have more money than you would by not working the job, so the taxes are kind of irrelevant.

Separately is whether or not you are in a higher tax bracket due to contributing less to your 401k. You are going to pay those taxes now or later anyway.

How much is the interest on this debt? Might it not make sense to continue to max the 401k and pay off the debt a month or two later?
Yeah I've thought about the idea of keeping my contributions going, but just get torn on what to do honestly. The idea of putting a higher amount in during this low period seems really appealing. I think the card percentage is at 16%
KlangFool
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Re: Higher taxes when I work more to pay off debt...

Post by KlangFool »

JB2013 wrote: Fri May 27, 2022 2:54 pm
My question is that If I'm going to get punished for working harder,
JB2013,

You are being punished for

A) Not having an emergency fund.

B) Go into debt in order to spend the money that you do not have.

C) So, now, you have to pay a lot of taxes in order to pay off the debt.

So, no, you are not being punished for working too hard. You are punished for doing (A) and (B).

KlangFool
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Topic Author
JB2013
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Re: Higher taxes when I work more to pay off debt...

Post by JB2013 »

KlangFool wrote: Fri May 27, 2022 3:20 pm
JB2013 wrote: Fri May 27, 2022 2:54 pm
My question is that If I'm going to get punished for working harder,
JB2013,

You are being punished for

A) Not having an emergency fund.

B) Go into debt in order to spend the money that you do not have.

C) So, now, you have to pay a lot of taxes in order to pay off the debt.

So, no, you are not being punished for working too hard. You are punished for doing (A) and (B).

KlangFool
Well said
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Lee_WSP
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Re: Higher taxes when I work more to pay off debt...

Post by Lee_WSP »

You are confusing a tax deferral from a permanent deduction. The 401k defers the taxes by allowing a deduction today. You don’t necessarily pay less tax (you actually may pay more) by taking the deduction, you are simply deferring it.

Based on your numbers, I don’t even think you’re crossing tax brackets (off the top of my head) and if you are, it’s just between the 22% & 24% so a measley 2% difference.
exodusNH
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Re: Higher taxes when I work more to pay off debt...

Post by exodusNH »

JB2013 wrote: Fri May 27, 2022 3:12 pm
exodusNH wrote: Fri May 27, 2022 3:05 pm
JB2013 wrote: Fri May 27, 2022 2:54 pm Hi all. I'm in the process of paying off some credit card debt due to a remodel that got into some unforenseen circumstances (as people warned us about). I have a regular 8-4 job that earns me a total of around $110 per year. I also have a side job that I can work basically whenever I want, and however much I want. Based upon my current earnings so far, I'm guessing I'll make around $35K for my side job, for a total income of about $145K this year.

I'm scheduled to work only two shifts per month with the side gig, but end up working an additional 15-20 hrs per pay period. I've come to realize this is really going to hit me hard with taxes as I'm trying to pay off the credit card debt which totals $7,500. Now, I get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off.

I made the decision to lower my 401K to only the match of 4% in order to increase my take home pay to pay down the debt. Previsouly I was contributing 21% and maxed out my 401K last yr which was around $750 per paycheck. Now I only deduct $154 for the 401K. A huge decrease! But in effect I'm then having to pay more taxes.

I looked at the 2021 Tax tables and if I keep the 401K at 4%, I would owe about $7,400 in taxes, which would mean I would have to pay $360 in taxes per paycheck. If I put the 401K at 20% to max it out for the year, my taxes go down to roughly $4,600, almost 3K less.

My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
Taxes don't take more than 100% of your income. Even in the highest tax bracket + FICA, you would not pay more than 45%, and that would only be if you were earning more than $500k per year.

The problem is that your side gig is calculating taxes based in earning $35k per year, which is obviously far lower than your actual tax bracket of 24%.

You should ask that your side gig withhold more taxes. That way, you don't get the surprise at filing.

How much in interest are you paying? You need to factor that number against the additional taxes.

As someone pointed out while I was typing, you're not avoiding taxes on your 401k contributions. You're delaying them until some time in the future. And who knows, taxes might be substantially higher then. Historically, they were much higher. As the US ages and the working population declines, revenue for Social Security and Medicare is going to have to come from somewhere.
Well, I treat both paychecks as one, so I just with hold more taxes on my primary job. I did the math and I would have to take around $360 per paycheck if I keep my 401K percentage at 4% to give the best guess to stay even on taxes owed at the end of the year. It's challenging because I can't predict how much that side job will for sure earn.

The interest on the card is around 16%. I've been charged around $55 the past several months for holding a balance, which hopefully if the roof doesn't collapse it will be fully paid off.
At 16% interest, it's worth incurring extra taxes to clear the debt.

If the monthly interest is $55, that implies about $55*12/.16 = $4,125 in credit card debt. Is that the amount we're talking about?
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FiveK
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Re: Higher taxes when I work more to pay off debt...

Post by FiveK »

Going by the Prioritizing investments suggestions, you are doing exactly the correct thing by reducing the 401k contribution to get only the maximum match, then directing all disposable income to paying the 16% debt. You could also reasonably reduce your emergency fund to pay down that debt.
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JazzTime
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Re: Higher taxes when I work more to pay off debt...

Post by JazzTime »

JB2013 wrote: Fri May 27, 2022 2:54 pm I'm going to get punished for working harder . . . and pay more taxes by getting more take home pay . . . .
Great observation. Welcome to the federal system of taxation! Please remember this when someone says "the rich aren't paying their fair share." One can avoid higher taxes by opting for a low paying job. :oops:
The difficulty with jazz is there are too many notes. (Borrowed from Emperor's critique in Amadeus)
joelly
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Re: Higher taxes when I work more to pay off debt...

Post by joelly »

JB2013 wrote: Fri May 27, 2022 2:54 pm Hi all. I'm in the process of paying off some credit card debt due to a remodel that got into some unforenseen circumstances (as people warned us about). I have a regular 8-4 job that earns me a total of around $110 per year. I also have a side job that I can work basically whenever I want, and however much I want. Based upon my current earnings so far, I'm guessing I'll make around $35K for my side job, for a total income of about $145K this year.

I'm scheduled to work only two shifts per month with the side gig, but end up working an additional 15-20 hrs per pay period. I've come to realize this is really going to hit me hard with taxes as I'm trying to pay off the credit card debt which totals $7,500. Now, I get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off.

I made the decision to lower my 401K to only the match of 4% in order to increase my take home pay to pay down the debt. Previsouly I was contributing 21% and maxed out my 401K last yr which was around $750 per paycheck. Now I only deduct $154 for the 401K. A huge decrease! But in effect I'm then having to pay more taxes.

I looked at the 2021 Tax tables and if I keep the 401K at 4%, I would owe about $7,400 in taxes, which would mean I would have to pay $360 in taxes per paycheck. If I put the 401K at 20% to max it out for the year, my taxes go down to roughly $4,600, almost 3K less.

My question is that If I'm going to get punished for working harder, which is what it feels like, and pay more taxes by getting more take home pay, how do you guys balance when paying off debt, but knowing you have to pay more in taxes by reducing the 401K contributions? Doesn't it make sense to keep those contributions going to avoid higher taxes anyway? I guess I'm just confused here looking for some guidance. Thanks!
Couldn’t you do a balance transfer to another credit card with 0% apr?

Otherwise, you’re already doing the right thing.

Sometimes life happens and we have to adjust. Something gotta give. Next time hopefully you’ll be better prepared.
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celia
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Re: Higher taxes when I work more to pay off debt...

Post by celia »

To help you see the bigger picture here, I suggest using last year's tax software to run your projected 2022 total incomes through it to see what your overall 2022 Federal and State taxes will be. (You can even start with a COPY of last year's data file and adjust your full time and part time incomes.) Compare that with how much has already been withheld for income taxes plus how much more will be withheld for the rest of the year. If these two numbers are close to each other, you're doing the best you can for now. But if you are over- or under-withholding, consider adjusting how much is withheld for taxes from your paycheck.

An advantage of having extra income this year, is that it will make your future Social Security benefit be a little more, since this year will probably be one of the 35 higher inflated-adjusted years used in the calculation for your monthly benefit.
Parkinglotracer
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Re: Higher taxes when I work more to pay off debt...

Post by Parkinglotracer »

When ever I do my taxes I divide what I paid by how much I made and see the percentage of my income I pay overall in federal taxes. I have not found it to be incredibly high. It’s a marginal tax bracket so one only pays the 22 or 24% on the next dollar made.

Let’s twist the scenario around and think wow - i have done great to make all that money to pay my debt I accumulated. Traveling around the world we know many places where there are no jobs. good luck.
tashnewbie
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Re: Higher taxes when I work more to pay off debt...

Post by tashnewbie »

harikaried wrote: Fri May 27, 2022 3:06 pm
JB2013 wrote: Fri May 27, 2022 2:54 pmI get a pay out with my full time job in July which will be around $6,500, so by that time the debt will be paid off
Sounds like you've reduced 401k contributions to have more cash flow now to pay less credit card interest overall. You could then increase 401k contributions after July to get back to maxing the 401k if you have enough cash flow for other regular expenses?
This is what I was thinking too. OP, you said the CC debt would be paid off in July under your current plan. After that, just bump your 401k deferral percentage so that you max it by the end of the year.
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