# Trying to make sense out of taxes with a tax software



## Taxsaver (Jun 7, 2009)

I put in some fictitious numbers in a tax preparation software. I left all the fields blank excepted for the employment income. These are the results I got:

1. Income of $48,000 = $9,166.79 in tax paid
2. Income of $49,000 = $9,628.29 in tax paid
3. Income of $50,000 = $9,939.79 in tax paid
4. Income of $51,000 = $10,251.29 in tax paid

My goal was to determine how much more tax would I pay if I earned one, two or three more thousands in overtime. I expected the tax rate to be the same, but it's not.

From 48K to 49K, I pay 46.15% on the OT.
From 48K to 50K, I pay 38.65%
From 48K to 51K, I pay 36.15%.

I thought that the rate to be used was the one in the Federal Tax On Taxable Income section of the 2009 CRA Forms.


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## steve41 (Apr 18, 2009)

Tax is a fairly simple calculation. What confuses people is the concept of tax rates. Your tax rate (the amount of tax you pay divided by your taxable income) increases as your income increases. You are probably confusing tax (the effective tax rate) with the marginal tax rate. The marginal tax rate is different than your actual (or effective) tax rate. The marginal tax rate will (generally) stay constant within a range defined by your tax bracket.

From 0- 10K your marginal rate is 0
from 10K to 41K .15%
from 41K to 82K 22%
from 82 to 127K 26%
over 127K 29% (these above brackets are approximate... the lowest isn't 10K it is 10320)

For example, if you earned 12K, you would pay tax (at 15%) on only the amount in excess of the 10320 minimum, so your tax would be 15% of $1680 or $252 Your eff tax rate would be 2.1%

Within those above ranges, your marginal tax rates stay constant. For simplicity, these are just federal taxes. There are similar rules for provincial taxes with different rates and slightly different brackets.

Marginal tax rates and effective tax rates confuse a lot of people.


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## Taxsaver (Jun 7, 2009)

I still have problems relating the marginal tax rate to the software's results. My concern was: How much tax am I going to pay if I earn, say $3000 in overtime this year.


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## OptsyEagle (Nov 29, 2009)

I can't re-confirm your results since I don't know what province you are in but I think you got the basic amounts. The government takes a lot of any extra money you might make. I guess they think you don't really need it. Who knows.

I remember back in the 90s when marginal tax rates in Ontario were about 53%. I would be going on a contract call in November, driving an hour or so outside of town late at night and I just couldn't get it out of my head that the government was getting more out of this contract than I was. Very demotivating indeed. I always tried to take December off, even though any money earned throughout the year added to this issue.

Good luck to you and I hope you will take some comfort in knowing that tax rates have decreased a considerable amount over the last 15 years or so.


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## Four Pillars (Apr 5, 2009)

Taxsaver said:


> I still have problems relating the marginal tax rate to the software's results. My concern was: How much tax am I going to pay if I earn, say $3000 in overtime this year.


This page has links to all the marginal rates for each province which include fed and prov tax. I'm not sure which numbers Steve provided - federal tax?

http://taxtips.ca/marginaltaxrates.htm

If you live in Ontario then if you make $48k and want to know how much tax will be paid on the next $3k then the rate is 31.15%

http://taxtips.ca/taxrates/on.htm

Tax payable would be $934.50 (on "other income") which does not quite match your results where it looks like the tax paid on that $3k is $1084.50. Which province do you live in? That might explain the difference or perhaps there is something else I'm not aware of.


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## Taxsaver (Jun 7, 2009)

I live in Ontario.


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## Four Pillars (Apr 5, 2009)

Just rereading your original post - I think there has to be something wrong with the way you are using the tax software. Those marginal tax rates you calculated are definitely wrong.

Personally, I would just go with the taxtips.ca numbers (31%) and forget about the tax software.

[edit]

Mm...I was trying the numbers on taxtips.ca calculator and I got the same result for the first $1000 (46% paid on the amount earned between $48k and $49k) WFT? The increase above $49k is taxed at 31% which is what I expected.

Ok - did a side by side comparison - the difference is the Ontario health premium which is $450 at $48k and $600 at $49k. The premium stays at $600 until your salary hits $72k.

http://www.rev.gov.on.ca/en/tax/healthpremium/rates.html

I'm not sure why your software is calculating so high for $49k to $51k though.


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## CanadianCapitalist (Mar 31, 2009)

The MTR on each dollar of additional earnings will fluctuate wildly even more so if you consider the impact on transfers such as CCTB, GST credit etc. I can't say I'm surprised very much by your findings. Check out this C.D. Howe report that shows how the METR jumps around (Figure 1 in Page 3):

http://www.cdhowe.org/pdf/ebrief_91.pdf

There are two spikes in the graph, one around $50K and the other over $75K when the METR is more than 50%. You think you are hitting the first of these (increase in OHIP around $48K) in your numbers.


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## steve41 (Apr 18, 2009)

I ran the numbers for Ontario, and your results are very close to what I get. Remember, there are a bunch of obscure surtaxes, healthcare levies, etc. As well, tax should really include EI and CPP deductions. The marginal tax rate is not of any significance. It only applies to very small incremental increases in income.... normally a single dollar. In your case, you are incrementing your income by $1000. The MTR has no meaning in that case... it is the tax FORMULA which applies.

Your numbers seem fine. Forget you ever heard of the marginal tax rate.

Back in the day, before computers, our parents did the calculation manually... they didn't invoke the MTR. It was part of the tax formulation... a more complex entity.


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## the-royal-mail (Dec 11, 2009)

I've don't worry about this for the simple reason explained throughout this thread. For instance, if I would earn $40K before OT and then had an OT decision to make (say I could have made an extra $5K) I was reminded by my accountant that I shouldn't worry about being bumped into a new bracket, because the new bracket % only applies for the actual small amount incremented over the maximum amount. So I would be taxed at 15% for 10Kto41K (using the numbers steve41 mentioned above) and then at 22% only for the extra $4K in OT which would be $880 of extra tax payable if you work the OT.

Considering you will have $3120 in your pocket by working the OT I certainly don't mind paying out $880 for the privilege. NOT working the OT deprives me of $3120.

I think this MRT is a VERY fair and equitable way of calculating tax. If they were using a simple % based on your ENTIRE earnings, depending on how much you earned, then yes, I would be concerned about making too much money.

Work the OT, make money.


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## the-royal-mail (Dec 11, 2009)

Though, CC and steve also make a good point about all the other "non tax" items. Only rebuttal I have is that after earning a certain amount you are no longer paying for CPP and EI. More money in your pocket.


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## Taxsaver (Jun 7, 2009)

the-royal-mail said:


> I've don't worry about this for the simple reason explained throughout this thread. For instance, if I would earn $40K before OT and then had an OT decision to make (say I could have made an extra $5K) I was reminded by my accountant that I shouldn't worry about being bumped into a new bracket, because the new bracket % only applies for the actual small amount incremented over the maximum amount. So I would be taxed at 15% for 10Kto41K (using the numbers steve41 mentioned above) and then at 22% only for the extra $4K in OT which would be $880 of extra tax payable if you work the OT.
> 
> Considering you will have $3120 in your pocket by working the OT I certainly don't mind paying out $880 for the privilege. NOT working the OT deprives me of $3120.
> 
> ...


Absolutely worthwhile to do the OT. When people tell me not to do OT because I will pay so much tax, I ask them if they would refuse a pay raise which will result in more tax. They ALWAYS say "no". People don't make sense, so why bother with them. Live the way you want and let them be idiots.


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## steve41 (Apr 18, 2009)

That reminds me of the silly CD Howe report that came out a while ago where the authors were on about the METAR, and how it could achieve rates of 60-100% or some such trash. My response is to go into any crowded room and ask for anyone to raise their hand if their effective tax rate exceeded 45%. Good luck with that.


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