# Why does tax bracket matter?



## jumbalaya (Jan 17, 2013)

Why do people try to avoid jumping up to the next tax bracket? That higher rate doesn't apply to ALL the income...

plus having a higher marginal tax rate helps with tax deductibility of loans made to invest

Not a troll question, I'm just stupid.

my followup question would be whether charitable donations have an effect on your tax bracket? according to their site, it seems to imply it just decreases the tax amount owed:

Tax savings
This is a non-refundable tax credit. As such, it can only be used to reduce tax owed; if you don't owe any tax, you don't get a refund. Generally, your tax savings will be equal to the amount of the charitable tax credit calculated

http://www.cra-arc.gc.ca/chrts-gvng/dnrs/svngs/clmng1-eng.html

Thanks


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## CadMan (Apr 16, 2010)

The people who say they can't afford to make any more money because it would put them in a higher tax bracket are ignorant about how tax brackets really work. That's all.


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## swoop_ds (Mar 2, 2010)

I don't know about your charity question.

As for the tax bracket, I have no idea why people don't want to enter the higher bracket. 

I used to be at a job that you could get significant overtime if you wanted it. Most people worked long hours but some people feared "going into the higher tax bracket" because they would "make less money". I think some of them knew that they would be getting more heavily taxed on the extra bit of money but I also think that some of them genuinely thought that the tax bracket effected ALL of their income... 

One of the reasons we need to teach this stuff in school...


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## jumbalaya (Jan 17, 2013)

ah, maybe i'm not stupid then  i was wondering if having a higher marginal tax rate affected people in other ways BESIDES having a bit of their money taxed heavily. i know people put money in their RRSPs to keep themselves in a lower tax bracket... even then, i still don't understand that.


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## andrewf (Mar 1, 2010)

People are stupid and bad at math. It's as simple as that, folks.


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## liquidfinance (Jan 28, 2011)

CadMan said:


> The people who say they can't afford to make any more money because it would put them in a higher tax bracket are ignorant about how tax brackets really work. That's all.



Boy oh boy. The countless conversations that I have had about this at work. 

Overtime is readily available to the extent the only thing preventing more overtime is the provincial limit. However that amount of people who say I will only for 5 hours or I pay to much tax. :cower::hopelessness:

I give up trying to explain now. I personally strive to be in a higher bracket and make more money. :biggrin:


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## nathan79 (Feb 21, 2011)

I actually once had a boss tell me I'd make less money after tax if he gave me a raise.


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## Plugging Along (Jan 3, 2011)

Charitable donations are a CREDIT, so they produce a refund that is not impacted by you tax bracket.


For the question about higher tax brackets, for some the higher tax bracket means that their hourly rate is less, so it becomes a value of time question. If you work an hour in the higher tax bracket you get less than if you worked an hour in the lower bracket. Yes, you get more money, but the marginal value is less. For some of us, our time is worth more than money. 

I was offered another part job on top of my regular job. The other job was a lesser paying job, but one of those fun things, however it would take me in a much higher bracket for the lesser job, so I decided it wasn't worth my time. For example, if a person makes $25 an hour full time normally they would hypothetically take home about $20 net, however if you were already in the top income bracket and this is supplementary, the take home may only be about $13. Now, it might not be so attractive.


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## Just a Guy (Mar 27, 2012)

Well, if you're in the lowest tax bracket, you're entitled to a number of benefits which can quickly disappear if you change brackets. You give up "free" money, or the money you've been contributing over your career (old age security for example). 

Now, this doesn't just apply to the working/nonworking poor, but also the elderly.


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## fraser (May 15, 2010)

We certainly pay attention to tax brackets. Why on earth pay more tax? We split my pension income, we do spousal loans in order to transfer investment income from one to the other in order that we both remain in the same tax bracket. 

When you jump to the next bracket, ONLY the income in that bracket gets taxed at the higher rate. So, you could well be in 39 percent tax bracket yet your average tax percentage might be 30 or 28 percent, or whatever depending on other items in your return.

In Alberta, the combined federal/provincial tax brackets percentages go 25, 32, 36, and 39 (top rate). 

Who wants to pay more...even incrementally. 25 to 32 is percent is a big jump, as are the others. Why pay an extra 7 percent on income that exceeds the 25 percent level if you can avoid it??? Managing your tax liability, and the timing of your that liability, when you bring RSP's back into income, and the OAP clawback all make good sense. Over the past ten years we have avoided a considerable amount of tax liability by getting professional tax advice/guidance. Our goal is to defer when it makes sense and to ensure that we are both in the same bracket, ie one not the lowest while the other is in the highest..


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## MrMatt (Dec 21, 2011)

CadMan said:


> The people who say they can't afford to make any more money because it would put them in a higher tax bracket are ignorant about how tax brackets really work. That's all.


I've seen that workplace one quite a bit, particularly on overtime paychecks when you see your % tax withheld skyrocket. 
It is more apparent at lower incomes, where people are less financially literate.

I was about 20 when a coworker finally explained, in appropriate detail, how it works.


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## cashinstinct (Apr 4, 2009)

One must make a difference between REAL marginal tax rate and the one shown in the tax tables.

There are some studies about real marginal rates depending on personal situation / other gov. programs.

Example for Quebec (in French):
https://www.cqff.com/claude_laferriere/courbe2013.htm

Someone can reach 75% marginal tax rate, see example here (many others on the page):
https://www.cqff.com/claude_laferriere/courbes2013/2013-courbe-251.pdf

Even found one with 100% marginal tax rate with 3 kids and low income:
https://www.cqff.com/claude_laferriere/courbes2013/2013-courbe-243.pdf

It's true that typically extra income is worth it because you have more money in the end, but when you pay 75% marginal tax rate (on low income true), you might not consider the 25% left worth it...


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## domelight (Oct 12, 2012)

Ok let me solve everyone's myths & mis-informations. I am going to keep this very basic

All provinces will only different slightly by their provincial tax rates, the federal rates are the same. This is based on your annual income using 2013 Federal thresholds in Ontario. (The provincial thresholds differ slightly)

$ 0.00 - $ 43,561 15% Fed 5.05% Provincial = 20.05% Total
$ 43,562 - $ 87,123 22% Fed 9.15% Provincial = 31.15% Total
$ 57,124 - $ 135,054 26% Fed 11.16% Provincial = 37.16% Total 
Above $ 135,055 29% Fed 
Above $ 509,000 13.16% Provincial


OK first you pay 20.05 on earnings up to 43,561 which = 8,733.98 (not actually correct but trying to keep this simple)
If you make another 10,000 then you will pay 3,115 on the 10,000. The 8733.98 does not change because you went to the next tax bracket. Each tax bracket pays that rate for earnings in that bracket.
--so lets summarize this, I'm just going to use round about numbers to show my point. lets say you make 40k for every 20 bucks you make you get to keep 16. after that for every 20 bucks you make you get to keep 14. but that dosent change the first 40k you made you still get to keep 16
dollars per 20 earned. Now the part everyone forgets is pension and employment insurance which is another 7% which is capped out at about 52,000. sooo......
If you made 80k this year at 20 dollars an hour. 
--for the first 40,000 you keep 14.60/hr.
--from 40k to 52k you keep 12.37/hr
--after 52 to 80k you keep 13.77/hr but in Ontario surtax kicks in around 60k which adds back 2% and then raises another 2% after 80k provincial bracket. Still cheaper than the income from 40-52k.

You will pay your annual income tax based on these brackets. So when you figure your overtime you need to look at the whole year.
The payroll tables are based on you earning the same paycheck everyweek. So if your overtime check Gross's $ 1,500 then the payroll tables assume you are making this everyweek and deduct taxes as appropriate. However if you normally gross $ 1,100 per week then the overage will be refunded to you at tax time based on the scale above.
Simply put at years endeverything reconciles out & the only thing that matters is your annual income. 

To the person who asked about RRSP's. Well simple if you make $120K a year and have no pension. (or sometimes even if you do) 
-Lets say you make 120k per year. If you buy 20K of RRSP's then you only pay tax on 100K.
-when your retired and make 15K a year you cash out the 20k in rrsp's and pay tax on 35k. based on the tables above you could save something here.
-after 65 rrsp's could be rolled to a rif and 2k per year come out tax reduced or tax free.
 -RRSP's grow tax free until you cash them. Leaving you a higher cashflow to reinvest.
-(personally I am not a fan of rsp's for my own reasons, however they do have valid tax planning benefits)

Now to answer the question that started it all.

-Donations are generally a fixed rate of savings The first $ 200 you donate will save Aprrox $ 44.10 (22.05%) After that its approx. 40.16%
-This just comes off you tax bill and is unaffected by brackets. (but limited to 75% of your net income)
-there can be a small impact if you pay surtax but I'm not going to try to type out that explanation.

In conclusion I never understand why someone wouldn't pay an accountant to get the right info on this stuff it can save you thousands. 
Kinda like changing brakes. change the pads when they need changing if you don't, your buying new rotors & calipers too.


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