Taxes When You Get a Raise or Promotion

A raise or promotion is great news financially, but it also affects your tax situation in ways that are worth understanding to make the most of your increased income.

The good news first: the U.S. tax system is progressive, meaning a raise doesn't suddenly make all your income taxable at a higher rate. Only the dollars above each bracket threshold are taxed at the higher rate. If a raise pushes $10,000 of your income from the 22% bracket into the 24% bracket, you pay an additional 2 cents per dollar on that $10,000 — an extra $200 in taxes — not 24% on all your income. However, a raise can cause your total income to cross thresholds that trigger phase-outs of valuable deductions and credits.

Several benefits phase out at higher income levels that a raise might push you past. The student loan interest deduction phases out between $75,000 and $90,000 for single filers. The ability to deduct traditional IRA contributions phases out between $77,000 and $87,000 for singles (if covered by a workplace plan). The ability to contribute directly to a Roth IRA phases out between $146,000 and $161,000 for singles and $230,000 and $240,000 for married couples in 2024. If your income crosses these thresholds, you'll need to use workarounds like the non-deductible traditional IRA or the backdoor Roth conversion.

A raise is an ideal time to increase your retirement plan contributions. Increasing your 401(k) contribution percentage means more of your higher salary goes in pre-tax, reducing your taxable income while building your retirement savings more aggressively. For 2024, you can contribute up to $23,000 to a 401(k) ($30,500 if you're 50 or older). Increasing contributions enough to offset part of the raise means you can boost your savings without a significant change in your take-home pay. If your employer offers a Health Savings Account and you're enrolled in a high-deductible health plan, increasing your HSA contribution (up to $4,150 for self-only or $8,300 for family coverage in 2024) is another pre-tax savings opportunity.

After a raise, update your W-4 withholding with your employer if your tax situation has changed significantly — particularly if you're now expected to owe or receive a large refund. A raise may also be the right moment to review whether increasing your income triggers the 3.8% Net Investment Income Tax on your investment income (triggered above $200,000 for singles, $250,000 for joint filers) or the 0.9% Additional Medicare Tax on wages above those thresholds. These surtaxes aren't automatically withheld by employers, so knowing they apply helps you avoid an unexpected balance due at filing time.