Personal Income Tax

Tax – The Deciding Factor

A six-figure earned income may not have as much spending power as expected after taxes.

Wages, salaries and all other forms of earned income have increased dramatically for those with the required skills who are willing to move to the parts of the country where such skills are in demand. Indeed, it is not unusual to see T4s at year end in excess of $100,000.

The satisfaction of earning a six-figure income is quickly tarnished, however, after the amount of federal and provincial tax has been calculated.

A $160,000 annual salary income, for instance, is equal to $13,333 per month. Based on 2013 personal tax calculations, however, a single person living and working in British Columbia, for example, would pay $52,423 in combined deductions from federal and provincial income tax, Canada Pension Plan (CPP) and Employment Insurance (EI).

Effect of Deductions

Given these figures, anyone in BC who earns $160,000 is going to take home $107,577 if salaried. On a monthly basis, this amounts to $8,965, a far cry from the $13,333 that appears on the payslip. For those who earn or aspire to earn in the six-figure range, consider the tax brackets for 2013 in the following table.

 

T4 Income $

Total Withholding Taxes $

Average Tax Rate %

Net Income $

Monthly Take-Home Pay $

Marginal Tax Rate* %

100,000

27,369

27.4

72,631

6,053

38.3

120,000

35,395

29.5

84,605

7,050

40.7

140,000

43,683

31.2

96,317

8,026

43.7

160,000

52,423

32.8

107,577

8,965

43.7

180,000

61,163

34.0

118,837

9,903

43.7

*The marginal tax rate represents the average additional income tax on the next $20,000 of income.

It is also important to note that, as marginal tax rates rise with additional income, there are fewer disposable dollars left until the maximum marginal rate is reached.

 

Base spending decisions on disposable income not gross income.

Gross Income vs. Disposable Income

The realization that gross income must not be construed as disposable income should be factored into any spending decisions. Financial decisions should be calculated on the basis of take-home, i.e., not gross, income. The following questions should guide any spending and saving decisions:

  1. How much are my monthly mortgage payments and utility bills?
  2. How much does it cost per month to service my student loans or other debts?
  3. If mortgage rates increase will I be able to meet the additional cash-flow drain?
  4. What is the price of mortgage insurance?
  5. How much are my property taxes?
  6. How much do I spend on rental accommodations, condominium or common-cost fees?
  7. How much do I need to put aside to accumulate the 20% down payment on a home?
  8. How much do I spend per month on food, clothing, repairs and maintenance, entertainment and other leisure activities?
  9. Should I purchase an expensive vehicle with payments spread over 84 months?
  10. What is the minimum after-tax dollar requirement to support my current lifestyle in the event I lose my job?
  11. How much do I need to put aside to cover a short-term layoff?
  12. If I need to borrow for an emergency, will I be able to pay down the line of credit?
  13. In the event of downsizing, will I be able to quickly find a new position with the same pay scale?
  14. Is it worth moving to take a new job that pays more?
  15. In the event I am ill, what is the cost of insurance to cover the cost of staying in my home?
  16. Can I afford to open an RRSP? What is my contribution limit? Can I afford to contribute?
  17. What is the cost of medical and dental insurance?
  18. What is the cost of going to and from the job site?
  19. Will I be able to help my parents if the need arises?
  20. Will increased earnings offset increases in the cost of living?
  21. How long will I continue to earn six figures?

 

Budget Strategically

“I’ve been rich and I’ve been poor. Believe me, rich is better.”

This pithy remark, often attributed to Sophie Tucker, Mae West and others is certainly true, regardless of who said it first. Earning more is better than earning less. But the principal factor in determining the amount of money available for lifestyle expenditure remains taxation. Those who already have six-figure incomes should carefully analyze the long-term impacts of a high debt load, future increases in the cost of living, and the risk of layoff in order to determine the best means of managing after-tax income wisely.


 

The preceding article is reprinted from the December 2014 newsletter Business Matters with the permission of the Canadian Institute of Chartered Accountants.  Business Matters is a bi-monthly newsletter, the full version of which can be obtained on request. 

This post deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

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