Got a Big Raise in 2023? You May Want to Make This Important Move

It could help you avoid a headache later on.

Inflation surged in 2022, leaving many consumers struggling to make ends meet. Thankfully, employers are stepping up to help workers cope with inflation. According to data from Willis Towers Watson, salary increases in the U.S. are projected to hit 4.6% in 2023. And while that's below the most recently reported rate of inflation, it's a pretty decent bump in pay nonetheless. 

But what if you're getting a raise this year that amounts to much more than a 4.6% boost? Maybe you snagged a promotion after years of hard work. Or maybe you just got an advanced degree that rendered you eligible for a big bump in pay. 

Either way, a higher salary is a good thing. It could mean getting to pump more money into your IRA account and getting to invest more in a brokerage account. It could also mean avoiding credit card debt for the first time in years. 

But a giant pay raise could also impact your tax situation. And that's an important thing to prepare for.

Your taxes might go up

The more money you make, the more taxes you're likely to pay. That's pretty simple. But what you may not realize is that earning a lot more money could bump you into a higher tax bracket, where you're paying a higher rate of tax on your highest dollars of earnings. If that happens, and you don't make any adjustments to the amount of tax you're having withheld from your paychecks, then you could end up owing the IRS money next year -- or owing more than usual.

That's why if you're getting a raise, a good bet is to set aside a portion of that extra money for tax purposes. That way, if you end up having to write the IRS a check in 2024, it won't be a source of panic and stress. Instead, you'll be able to simply dip into your savings account and come up with the money.

It's not just a raise that could result in a higher tax bill

Earning more money at your job could easily result in a scenario where your tax burden goes up. But that might happen for other reasons, too. 

This year, for example, savings accounts are paying more interest. So if you earn a lot of interest income, it could potentially propel you into a higher tax bracket or cause you to owe some money to the IRS next year. The same could easily hold true if you sell a lot of investments at a profit in your brokerage account. 

That's why it's always a good idea to have extra money set aside for tax bill purposes -- even if you typically end up getting a refund. The IRS will work with you if you can't pay a tax bill in full, but in that scenario, you'll accrue interest and penalties for being late. A better bet is to put yourself in a position where you can pay your tax bill in full by the time it comes due.