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Taxes Made Simple

When it comes to taxes, there is still some confusion regarding how it all works.  If you work an extra hour, does it all just go to taxes?  The answer is no, it doesn't.  Both federal taxes and BC taxes are considered progressive (this is different from Alberta which has a flat income tax structure).

A progressive tax system separates your annual income into "segments" and then applies a tax rate to the income in each of those segments.  For 2014, the combined provincial and federal taxes for British Columbians are shown below.


What would it look like if we were to apply different annual salaries to this progressive tax system?  To illustrate this, you'll see a chart showing 3 different annual salary and the levels of taxation they would experience.

You'll notice that all three salaries exceed the first tax bracket, thus each salary will owe $5,309 in taxes to start.  In the next bracket however, the first salary falls within the bracket resulting in remaining taxes of around $543.  As the other two salaries exceed this bracket, they owe the total amount of tax within this bracket (approximately $1,441).

So what's the take away?  Essentially, your annual income is broken down into segments starting from the bottom.  As you fill each bracket, you are taxed the corresponding amount within that bracket.  Taking this a step further, if you were to assume your salary was $75,000 per year and you were asked to work some overtime that would increase your annual salary to $80,000 would it simply all go to taxes?  More importantly, would it cost you more in taxes overall to take the overtime?  The answer to both of these is no and here is why.

The additional $214 ($75,000 - $75,214) would be taxed at 32.5%, while the remaining $4,786 would be in the next bracket and taxed at 34.29%.  This means you would only pay a total of $1,711 in taxes and "take home" the remaining $3,289.  That extra overtime would definitely be worth it.

At the end of the day, every dollar you can earn is more money in your pocket, regardless of which tax bracket that dollar falls into.  The great thing about a progressive tax system is that you`ll never have to worry about the higher tax brackets unless you`re making more money.  Come to think of it, that`s not a bad problem to have.