A tenacious myth persists in the mind of many people, this idea of a boundary beyond which lies a territory named “New-Bracket-Tax” where lurks an ogre called ” The Tax man “.
According to this legend, the monster you bouffera half of your pay if you have the audacity to drop the little toe in the area cursed !
It is so scary, it makes you want to stay home !
This tale conveys an erroneous conception of the taxation, a belief that ensures that, in trying to save the money of the claws of the beast, one night, to his own enrichment. This conviction of some leads them to make bad decisions, especially in regards to extra hours at work, but also in terms of tax strategies.
A cross-canada survey on literacy, tax has recently put in relief this lack of knowledge that we have of the way in which are collected the taxes.
I’ve received a few messages that confirm the findings of this study which was attended by the research Chair in taxation and public finance from the University of Sherbrooke.
Readers responded to my recent column called ” how well do you Know all the samples on your payroll “. I wrote that an income of $ 50,000 is subject to “average rate” of tax of 20.2% and that it rose to 29.2 % on a salary of $ 100,000. It surprised many.
“How ? To $ 100,000, fails to pay-does it not almost 50 % income tax ? ” me-t we requested. Well, no, here’s why.
A system for bearings
The confusion has its origins in a feature of the actual of our tax system, levels of taxation. Our system is progressive, which means that the higher the income, the higher they are taxed.
Contrary to the belief, however, all the dollars that make up our salary are not affected by a tax rate even increases as it crosses new thresholds of income.
It is necessary to break down our revenues by slices. On each of these slices applies a different tax rate, regardless of the total remuneration.
The first $ 13 000 $, for example, is not taxed at all, for anyone, whether you are vice-president of a company or store clerk. The second is a little bit, the third a little more, the next even more, and so on.
By combining the federal tax and Quebec, including the scales of taxation does not increase to a synchronized way, we consider here a dozen levels of taxation. The highest rate is of 53,31 %. In 2020, it hits the high-income bracket 214 368 $, so the 214 369e dollar and the following.
Only the last dollars earned are taxed at the higher rate. This is why it is called the ” marginal tax rate “, it is the tax paid by a taxpayer on its last dollar at the margin.
The income between 97 069 $ and 108 $ 390 usd are taxed at a rate of 45,71 % (2020). Someone making $ 100,000 pays this rate on a small portion only of his compensation, or the portion in excess of 97 069 $. Below it, there is six other slices on which the tax is lower (41,12 % ; 37,12 % ; 32,53 % ; 27,53 % ; 12,53 % ; 0 %).
It is by taking the average of the tax paid on the entire income of $ 100,000 we get around 29 %.
It does not change to ” bracket “
Therefore, there is no reason to be afraid of accumulate overtime and make more money. It does not change to “bracket” of tax that we suddenly switch to a world where the inland revenue, we eat all of our payroll.
What we earn already will not be imposed because it increases his compensation. This is only on the additional income, if they break through to a new level, we will pay a little more taxes.
It is essential to understand the mechanics, because it explains the majority of tax strategies, including the use of RRSPS and income splitting for retirees.