Your True Income Tax Rate

I’m currently reading The Only Investment Guide You’ll Ever Need by Andrew Tobias (great book, by the way – useful AND fun), and he says the real income tax rate is not your % bracket, typically 21.5% or 37% for example.

Since the system is graduated, you don’t pay any tax at all on the first few dollars, but you pay the highest percentage on the last few dollars. I used to calculate the tax payable in relationship to the full income – like most people. Usually it doesn’t look that bad, thanks to the deductions we pay under 15% of gross earnings (plus, of course the GST we collect from the clients and 14% tax we pay on purchases at the store. When you add these up, you end up with a much higher number).

What Andrew Tobias suggests is to see your true income tax rate, after you make all the calculations for the year, add on another $1,000 of income and see by how much your tax bill changes – the extra payable amount on that additional $1,000 will show you your real tax bracket.

I opened up our QuickTax file and added $1,000 to my income alone. It did not put me into a different federal or provincial tax bracket, yet it added $420 and change to my tax bill! 42% is my tax rate for every additional $1 until I get to the next tax bracket, and then it’ll increase some more. 1 penny saved becomes almost 2 pennies earned 🙁