American tax law is ridiculously over-complicated and there is a lot of misinformation and scams out there. I’m not a lawyer, I’m no longer a certified tax professional (although I used to be), and this is just my opinion and personal experience. But I’m really frustrated seeing these particular myths so often.

Common Myth #1: You will earn less money if you get a raise that places you into a higher tax bracket

At $91,900 of taxable income per year in 2017, as a single person with no kids, your federal tax bracket increases from 25% to 28%. This does not mean that someone who earns $91,899 in taxable income pays $22,975 in taxes (25%) and someone who earns $91,901 pays $25,732 (28%). If they did, that would suck (you’d loose $2,757 just by getting a $2 raise).

How tax brackets actually work is that you pay the bracket percentage at each tier. So, your first $9,325 you earn is taxed at 10%. Then, everything between $9,325 and $37,950 is taxed at 15%. This continues through each bracket.

So, in our example, someone earning $91,899 is only paying around $18,713. The person with the $2 raise only gets that additional dollar taxed at the 28% rate… so they pay maybe another fifty cents or so in taxes. Fifty cents isn’t a big deal when you’re making nearly six figures (whereas $2,700 is a rent payment or two for most people at that income).

Common Myth #2: If I donate $100 to a tax deductible charity, I’ll owe $100 less on my taxes

This one is perpetuated by commercials promising tax deductions for your donations. This one is partially true for some people. However, in my experience, it doesn’t apply to most people who do not own their own homes or businesses. If it does apply to you, you’ll be disappointed in how much money you actually save.

Let’s walk through an example. Let’s say I earn $100,000 per year. My taxable income will not be $100,000. My personal exemption is $4,050 (which means the first $4,050 I earn isn’t taxed at all. That’s all mine). Additionally, I may have several deductions. The standard deduction for someone who is single with no kids is $6,350. That further reduces my taxable income. So, my $100,000 income is only $89,600 of taxable income (note: just these two items reduced my income to a lower tax bracket!). I’d be looking at around $18,178 in taxes.

You may either choose the standard deduction or itemized deductions. Unless your itemized deductions add up to over $6,350, it’s not worth it to itemize. Home mortgage interest, business expenses, and charitable donations are some of the most common itemized deductions. Unless you own a home or small business, you probably won’t hit the $6,350.

I don’t own a home or business, so it’s unlikely my mortgage interest or business expenses will ever add up to over $6,350. I could, however, donate $7,000 to my favorite charity. This will not reduce the taxes I owe. Instead, it reduces my taxable income to $88,950, because I can choose to use the itemized deductions (my donations) instead of the standard deduction. This reduces my total taxes paid to around $18,003.

Let me reiterate: donating $7,000 to my favorite charity reduced the taxes I owe by $175. If you’re donating to charities out of the goodness of your heart, great! If you’re donating money to reduce your tax bill, don’t.

Common Myth #3: Retirement funds don’t make a huge difference in taxes

Again, let’s say I make $100,000. I want to reduce my taxable income, and donations to charity obviously aren’t the answer. I have the option, through my employer, to make pre-tax contributions to Health Savings Accounts and 401ks. I elect to place 5% of my income in the 401k, and 1% into the HSA. At the end of a year, I’ll have $5,000 growing in a retirement account, and $1,000 ready for a medical emergency. This is a smart emergency fund and retirement investment strategy.

But it’s also a smart tax strategy. Because the contributions are pre-tax, it reduces my taxable income from $100,000 to $94,000. Subtract my standard deduction and personal exemption, and we’re down to $83,600 of taxable income. That comes out to around $16,428 in taxes.

By electing to set aside $5,000 to retirement and $1,000 to my medical emergency fund, I’ll pay $1,750 less in taxes every year. I’m investing, I’m securing myself in case of a medical emergency, and I’m paying less taxes. Win-win-win.

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