How an additional $1,000 in income can cost you $6,420 more in premiums in CA

[Sgent]

79. This does happen in the tax code

although the effects are usually much better hidden.

Unlike some posters up thread have said, the tax code is generally graduated, meaning that only the last dollar is taxed at the highest rates, whereas the first dollar is taxed at lower rates.

However, there are some situations where this isn't the case and $1 of extra income can result in a much higher tax bill ($1000's). They generally involve:

1) High enough income to push you into the AMT, combined with AMT susceptible taxes. I know of one couple who earned $500 more from a hobby in one year and owed $3,500 in extra in income taxes....

2) The "right" combination of earned income and capital gains, such that your overall AGI pushes your capital gains rate into the next tax bracket.

Not to mention the loss of deductions, exemptions, etc. once your income reaches a certain level.

I've seen the effective marginal rate as high as 62% for 2012 (for federal taxes, based on $5,000 chunks) , depending on the exact situation.