Looking Forward to a January 1st Raise
Come January, I’m expecting a huge raise. Most workers get a huge raise at the start of a new year, but they don’t realize it. In the last days of the year, you are taxed at your top marginal rate, but in January the slate is clean and your income is untaxed for a while.
You won’t see any of this on your pay stub, though. Payroll taxes are designed to smooth out the effect I’m talking about by predicting your final taxable income and taking equal amounts of tax off each pay. But your real taxes are based on your actual income using progressive percentages.
For a person earning $100,000 per year in Ontario, after-tax pay at the end of this year is $28.92 per hour, but will rise to $51.11 per hour starting in January (based on 37.5 hours per week and 365.25 days per year). Of course, it will then drop off over the course of 2012.
For most of us who collect a regular income for the whole year, none of this makes much difference, but for those who work irregularly of for irregular pay rates, this effect can be important.
For example, if you’re planning to quit your job to live off your savings for a few years and see the world, it’s better to wait until March than to quit in December. This way you’ll get paid during the high-income period at the start of the year.
If you’re planning to do something that will cause a big change in your income, it pays to understand our progressive tax system and how it affects your final tax bill.
You won’t see any of this on your pay stub, though. Payroll taxes are designed to smooth out the effect I’m talking about by predicting your final taxable income and taking equal amounts of tax off each pay. But your real taxes are based on your actual income using progressive percentages.
For a person earning $100,000 per year in Ontario, after-tax pay at the end of this year is $28.92 per hour, but will rise to $51.11 per hour starting in January (based on 37.5 hours per week and 365.25 days per year). Of course, it will then drop off over the course of 2012.
For most of us who collect a regular income for the whole year, none of this makes much difference, but for those who work irregularly of for irregular pay rates, this effect can be important.
For example, if you’re planning to quit your job to live off your savings for a few years and see the world, it’s better to wait until March than to quit in December. This way you’ll get paid during the high-income period at the start of the year.
If you’re planning to do something that will cause a big change in your income, it pays to understand our progressive tax system and how it affects your final tax bill.
I think you just pushed my retirement back a few months!! darned internet...
ReplyDeletethanks (again) for your blog
@Anonymous: I'm just glad to do my part to keep Canadians working longer :-)
ReplyDeleteTurning "tax freedom day" on its head. I like it.
ReplyDeleteI wasn't sure what angle you were playing until you mentioned the practical advice of resigning mid-year. That's solid advice.
ReplyDeleteI have a friend who would prefer to work six or eight months a year but figures he would have trouble finding an employer who would go for it. Sometimes expenses expand to consume spare wages though, so I'm not sure he is still interested in that idea.
Another way to pay less taxes is to find a lower-paying job. I think I read that on a Wal*Mart recruitment pamphlet.
Enjoy those extra few months of work, Anonymous. Thanks for funding our health care a little longer!
@Potato: The real tax freedom day is Jan. 1.
ReplyDelete@Gene: Working 6 or 8 months per year sounds good to me, but not Walmart.
Great post MJ!
ReplyDelete