Have you ever heard of anyone complaining about making more money? If you have, they probably grumbled about moving up a tax bracket. Many people assume that when they “move up a tax bracket” every dollar they earn is taxed at a new, higher rate leading to lower take-home pay overall.

Thankfully, that isn’t the case. When you “move up a tax bracket” you only pay a higher tax rate on the income above a threshold. The rest of your income is taxed at the same rate (or rates) as before.

In this article we explain what it really means to move up a tax bracket, how to calculate your tax bill, and the possible downsides of earning more.

What Does Moving Up a Tax Bracket Mean?

The United States has a “progressive” income tax code. That means the first dollar you earn is taxed at a lower rate than the last dollar you earn. It’s important to note that the United States taxes your adjusted gross income (AGI).

Adjusted gross income is all your income subject to income tax (wages, business profits, dividends, interest from high-yield accounts, etc.) less any deductions and adjustments you’re entitled to. For example, if you don’t itemize your taxes, you’ll still qualify for the “standard” deduction of $12,950 for a single filer or $25,900 for a married couple filing jointly.

An individual claiming the standard deduction gets $12,950 in income-tax-free money. If she earns exactly $12,950, her adjusted gross income is $0, so she pays no taxes. If she earns more than $12,950, her adjusted gross income is taxed. Her first dollar earned above $12,950 is taxed at 10%. But the rate gets progressively higher as she earns a higher adjusted gross income.

Below you can see exactly how this works out for various single filers. The income in these examples assume that the person takes no other tax breaks other than the individual deduction.

The income brackets change if you’re married filing jointly, married filing separately, or a head of household filer.

Related: Effective Tax Rates: How Much You Really Pay In Taxes

Good News: Earning More Means Taking Home More Money!

As you earn more money, you will pay more in taxes. And when you cross into a new tax bracket, some of the money you earn will be taxed at a higher rate. But not all your money will be taxed at that higher rate. When you earn more money, you should see a bigger paycheck.

The one caveat to this is that many raises coincide the start of the year. That’s also the time when your benefits change. In some cases the rising cost of health insurance (or other changes you make) could cause you to see less money in your check even though you’re earning more.

Bad News: You May No Longer Qualify for Certain Benefits!

While you’re almost always going to see a bigger paycheck when you earn more money, earning more isn’t always a panacea. In some cases, earning more money means you “fall off” a benefits cliff. That means that by earning more, you may suddenly be disqualified for certain benefits.

This issue is particularly pronounced for many working people who earn less-than-average wages for their area. Here are a few examples:

• Before his most recent promotion, Robert qualified for $60 per week in SNAP benefits. With his most recent raise (he earns $3 per hour more than he did previously), he loses his SNAP benefits. Assuming he works 40 hours per week, his pre-tax pay rises by $120 per week, but he loses $60 in benefits. Once taxes are taken out, his earning is just a touch higher than it was before.
• Before her promotion, Nina’s children qualified for CHIP or the state-run health insurance program. After her $5,200 annual raise, the children no longer qualify for the program. She has to pay for their insurance through her employer. The cost of adding the kids is $300 per month. That means that $3,600 of her raise goes straight towards replacing a benefit that she previously received for free.
• Hannah qualifies for a Section 8 housing voucher. Under the terms of her voucher, exactly 30% of her income goes to housing. When she gets a raise of $2 per hour, she will earn $350 more per month on average. Her portion of the rent increases by $105. If her earnings go too high, she may be disqualified from the housing voucher program completely.

Self-employed people who buy insurance through the healthcare exchange (Healthcare.gov) may see their “premium tax credits” fall as their income rises. The result may be that earning more money could translate to paying more for health insurance. Or worse, paying back some of the premium tax credits when you file your taxes.

It can be discouraging to work hard to earn more only to have the extra money be eaten up by paying for benefits. It’s especially discouraging when you can barely afford the new expense.

In spite of losing out on these benefits in the short term, I would encourage to continue working to earn more over time. Once you’re accustomed to paying for certain things out of your paycheck, each extra dollar you earn will move you forward financially.

Why Does Your Tax Bracket Matter?

Since most people slowly inch up from one tax bracket to the next, it may not seem like tax brackets are particularly meaningful. After all, you’re going to pay taxes no matter what your bracket is. However, understanding your normal tax bracket can help you take advantage of years when you earn less than average.

For example, if your business takes a loss one year, you may want to take advantage of being in a low tax bracket to convert some money from a traditional IRA to a Roth IRA. That way you get the advantage of paying tax at a low rate now, and then avoiding any tax on it in the future.

You could also consider making moves like “capitalizing” business expenses rather than expensing them. Or, in a year where you have a particularly high tax rate, consider making large charitable contributions during the calendar year rather than putting them off.

Your expected tax bracket may also influence you to increase or decrease your withholdings at work.