What determines how much income tax I’ll pay in April? When I was making just 18k a year I had a tax bill of around $600. Now I’m making more, around 60k, but I’m getting a refund for a couple grand. Why is that?
The amount of total income tax you pay is calculated as a percentage of your income. (I’m ignoring, for the moment, the complex calculation of things such as donations and investing which can affect income tax bills for the sake of simplicity.) If you were to make under $13,000 you wouldn’t need to pay any income tax. As your income goes up beyond $13,000 you gradually get taxed at a higher rate. The Federal tax rates are listed on the Canada Revenue Agency (CRA) website.
In most situations employers will deduct the amount of income tax you owe when they pay you. They know approximately how much you will make through the year and can estimate how much you will owe in taxes. Then they take that portion off your paycheque. This portion deducted from your pay is sent to the CRA on your behalf.
Then, around April each year, the CRA looks at how much you made in total the previous year and how much taxes your employer took off and sent to them on your behalf. If you employer deducted too much of your income for the CRA then you get that extra amount back as a refund. However, if your employer didn’t take off enough money from your paycheques, then you’ll end up owing the CRA money in April.
In short, how much you will be refunded (or how much you will owe) in April is determined by two main things:
- How much money you made throughout the year.
- How much money your employer already deducted from your paycheque.
In this situation, it sounds as though the person who asked this question made a small amount of money ($18,000) the first year, and probably only owed around $1,000 in total for taxes. The employer probably took off just $400 of the $1,000 for them, resulting in the $600 tax bill in April.
The second year, where the person made $60,000, their employer took off too much money from each paycheque (about $150 too much per month). As a result the employer sent too much money to the CRA and then the CRA sent it back in the form of a refund.
Why do companies deduct too much or too little money from your paycheque? They are estimating what they think you will owe on taxes each year, but they don’t know all the little factors which can alter your tax return. Any donations, medical bills, investments, side jobs, change in marital status, or other credits can shift the amount of money you will end up owing.
Some people hope to get large tax returns each year, but a large tax return means your money has been sitting in the CRA’s bank account throughout the year and now they’re just giving it back to you. If your employer deducted the correct amount of money from your cheque you would have had the money coming into your bank account throughout the year and not receive a refund.
In most cases employers estimate how much your are going to owe in income tax each year and deduct approximately the right amount, give or take a few hundred dollars. However, if you find you end up getting a large refund each year (or you end up owing the CRA money) then you can fix the situation. Visit the CRA website and get a copy of the TD1 forms. There is one Federal form and one Provincial form. Make sure you download both the Federal form and the form for your province.
The TD1 forms provide information which will give your employer a better estimate of how much of your income to deduct and send to the CRA. Fill out both forms and give them to your employer with a request to adjust the amount of tax which is deducted from your paycheque.
Comments are closed, but trackbacks and pingbacks are open.