There’s a nasty surprise lurking for anyone who gets a big raise and decides for selling stocks shortly afterward. You think you’re finally “making it,” maybe cashing out a few shares to celebrate or rebalance your portfolio—and then bam! Your tax bill looks like it went through a steroid regimen behind your back.
It isn’t bad luck. It isn’t some hidden IRS trick. It’s math. Specifically, it’s the combo of income stacking and a widespread misunderstanding of marginal versus effective tax rates. Once you understand how these gears mesh, the shock stops being mysterious and starts being something you can plan around.
Let’s pop the hood and see what’s really happening.
The Raise That Quietly Changes Everything
When most people get a raise, the thought process usually goes like this:
“I’m in a higher tax bracket now, so some of my income is taxed more.”
That’s true… but it’s only part of the picture. There’s more going on behind the scenes.
When you sell stock after a raise, your gains aren’t taxed in isolation. They stack on top of your new, higher salary. The IRS doesn’t care whether the money came from your paycheck or your brokerage account; it just adds everything together. That stacking effect is why a stock sale that felt harmless last year suddenly seems like a nuclear bomb this year.
Think of your income as a layered cake. Salary forms the base. Your raise adds another thick layer. Stock sales pile on top, like frosting that’s way sweeter (and stickier) than you expected. That final layer—the stock gains—is taxed at the highest rate your total income hits, not some comfortable average.
That’s the core of income stacking.
Marginal vs Effective Tax Rates: Why the Confusion Happens
Here’s where brains start to hurt.
Effective tax rate: the average rate you pay across all your income. If you made $100,000 and paid $15,000 in federal taxes, your effective rate is 15%.
Marginal tax rate: the rate applied to your last dollar earned. If your top bracket is 24%, then every extra dollar you earn (salary, bonus, or capital gain) in that range gets taxed at 24%, even if the rest was taxed less.
Selling stocks after a raise? Your gains aren’t taxed at your effective rate. They’re taxed at your marginal rate, the rate that applies to the last dollar in your total income stack.
Picture a glass of water. Your base salary fills most of it. Your raise fills it closer to the rim. The capital gains? They’re the last ounces poured in—and those final ounces hit the highest tax rate. Suddenly, the tax feels “explosive.”
Why Capital Gains Hurt More After a Raise
Long-term capital gains have their own brackets—commonly 0%, 15%, and 20%—but which bracket you fall into depends on your total taxable income, not just the gains themselves.
Here’s the sneaky part: a raise can quietly push you out of the 0% or 15% bracket and into the next one, dramatically increasing the tax rate on gains you thought were safe.
Example 1 (simplified):
- Year 1: Salary $80,000. You sell $10,000 in stock gains.
- You might pay 0% or 15% on the gains.
- Year 2: Salary $130,000. Same $10,000 gain.
- Suddenly, part or all of the gain is taxed at 20%.
Same stock, same sale, very different outcome. Only your income stack changed.
The Hidden Multiplier Effect
It doesn’t stop at capital gains. Crossing certain income thresholds can trigger other taxes and phase-outs, such as:
- Loss of deductions or tax credits
- Higher Medicare premiums in future years (IRMAA)
- Net Investment Income Tax (NIIT) for high earners
That means a raise doesn’t just increase tax on your paycheck. It magnifies the tax bite on everything else you earn that year. The “bonus effect” of income stacking is why people say, “I paid way more than I expected.”
Nothing illegal, nothing unfair—it’s just the system doing exactly what it was designed to do.
A Concrete Comparison
Let’s make this real.
Scenario: Selling $20,000 of stock
- Year 1: Salary $90,000, stock gain $20,000
- Capital gains mostly land in the 15% bracket.
- Year 2: Salary $150,000, same stock gain $20,000
- The same $20,000 gain now sits in the 20% bracket.
Same sale. Same stock. Different tax bite. Timing matters more than most people realize.
Why This Feels Emotionally Wrong
Psychologically, a raise feels earned. Selling stock feels separate. Your brain separates “salary” from “investments” and assumes they exist in parallel universes. The tax code doesn’t see things that way—it only sees totals.
This mismatch between perception and reality is why the shock feels personal. In truth, it’s structural. Once you accept that, planning becomes much easier.
How Smart Investors Navigate This
This isn’t about dodging taxes. It’s about timing and strategy. People who manage income stacking often:
- Delay selling until a lower-income year
- Spread gains across multiple years to avoid hitting the top of a bracket
- Harvest losses to offset gains
- Sell before a raise or bonus is processed
- Pair stock sales with retirement contributions to reduce taxable income
The goal is simple: keep capital gains from landing in the most expensive spot on your income stack.
Extra Example: Multiple Strategies in Action
Imagine you just got a $40,000 raise and have $30,000 in stock gains. You have a choice:
- Sell everything now: Entire gain taxed at the new top bracket. Big bite.
- Sell half this year, half next year: Spreads the gain across years. Some taxed lower.
- Sell after maxing retirement contributions: Reduces taxable income, potentially lowering your marginal rate.
Strategic timing can shave thousands off your tax bill. Small moves, big impact.
Quick Tips to Avoid the “Explosion”
- Estimate your post-raise tax before selling. Use a capital gains calculator or tax software.
- Plan around raises and bonuses. Stock sales after a raise can feel painless—until tax season.
- Consider partial sales instead of lump-sum moves.
- Pair gains with losses. Tax-loss harvesting offsets some of the impact.
- Max out pre-tax accounts like 401(k)s or IRAs to lower taxable income.
Even just seeing the numbers laid out can take the panic out of “holy crap, my tax bill!” territory.
The Big Takeaway
A raise doesn’t just increase your paycheck. It changes the tax physics of your entire financial life. When you sell stocks after a big income jump, you’re not just selling shares—you’re stacking income in the most expensive layer of your stack.
Understanding marginal vs effective tax rates turns a surprise into a strategy problem instead of a panic attack. Money doesn’t explode randomly—it explodes when pressure builds and timing is ignored.
Planning isn’t cheating. It’s smart. And once you see the pressure points, you stop being surprised by the blast.
Before you sell, it helps to see the numbers clearly. To estimate how much capital gains tax you might owe based on your income and timing, use our Capital Gains Tax Calculator at Capitaltaxgain.com. Plug in your stock sale details and see how income stacking affects your tax bill—before the IRS does.
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