Progressive income tax

[noelenrik00200]

How does progressive income tax actually work (in as simple terms as possible)

The way I understood it is that you only get taxed the prescribed amount on the income that is in that tax bracket

The way a lot of people understand it is that as soon as you hit the next tax bracket, you’re taxed your entire income at that bracket’s income amount

If you make 355k, you’re in the highest tax bracket… but if you only make just 355k or not much more, you should get a ton of taxes back at income tax time right?

I’m wondering as I’m currently taxed 43% to 48% on every paycheck (depending on whether or not I work overtime), but technically I should be getting taxed 20% up to x amount, then the next bracket up to x amount…

Am I thinking about this all wrong?

 

[hiswayorhighway]

@noelenrik00200 You won’t get a ton back. Pay systems already take all of this into account. You don’t pay more taxes unless you specifically ask for it

 

[hundreddays]

@noelenrik00200 Did this graphic chart for myself back in 2021, but it shows in a quick visual way Canada's progressive tax system. Numbers are a little hard to read, but you get the general idea that the more you make, the more taxes you pay (income is in 5k increments). The key thing to notice is the line is linear/smooth, there are no "big jumps in tax brackets" like people imagine.

income tax chart

 

[noelenrik00200]

@hundreddays That’s really helpful thanks so much!

 

[zacharyb]

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[colin44]

@noelenrik00200 Your thinking is correct. For example: 15% up to $49,000 income; then 20% on $49,001 to $74,000; then 25% on $74,001 to $100,000 etc. Numbers and percentages used are for example purposes only

 

[noelenrik00200]

@colin44 So essentially if you’re in the top tax bracket and you get taxed normally (48% in Alberta), you should have a very large tax return?

 

[zacharyb]

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[giselh89]

@noelenrik00200 No, your return shouldn't be large generally.

 

[giselh89]

@noelenrik00200 Unless your income is variable and/or you have multiple income streams, your payroll withholding for income tax should be pretty close to what you actually owe.

 

[smokymountaineer]

@noelenrik00200 https://www.canada.ca/en/revenue-ag...rates-individuals-current-previous-years.html

 

[billups]

@noelenrik00200 Fortunately, you are right and everybody else is wrong.

You only pay the given tax rate on income earned in that bracket. It's a very common misconception that your whole income is taxed at your marginal rate. In fact, I have personally seen people turn down raises because they think they'll wind up with less money.