What Really is Taxable Income?
For the average tax payer what they tend to focus on when it comes to their tax situation is how much they made and how much tax do they owe on this. Then they go about having their tax returns completed and hope they don’t have to write a cheque to the tax department to go along with it.
There isn’t too much about the general tax return forms that the average tax payer really understands. There are a few lines on it that they know are important and one of this is line 260 the taxable income. Most will look at their T4’s at the gross amount they made and assume this was the amount they made so this is what they are paying taxes on.
They also have a general idea that the amount of taxes they will be paying is a specific percentage on that amount. What they may not realize is that the percent amount is based on the amount of taxable income, which may not be the same as total income.
It all begins with your having to determine all of your income. On your tax return this is all entered between lines 101 to line 147. Once you have added up all of your entries on these lines you enter that total on line 150. Okay so far so good, you now know what your gross income is.
Here is where you now get to make some deductions off your gross income amount because there are some amounts of money that you don’t have to pay tax on. You really want to pay close attention to this section because it could be the beginning of some potential tax savings. All of these calculations are made on lines 207 through to 235, at which time you now deduct the total of these deductions from the figure you had entered on line 150 which was your gross income. Line 236 now depicts your net income. You haven’t quite reached the amount yet that you will be paying taxes on, so its time to now move onto the taxable income.
From line 244 to 257 you get to put in any of the applicable amounts that you are entitled to, then when you add all of these up you can deduct this amount from your net income and the final figure ends up on line 260, which is your taxable income. This is the figure that you really want to pay attention to because this is the amount that is going to be used for your tax calculation. It is the figure that determines what percentage of tax you are going to be paying. You now have the task of figuring out the actual amount of Federal tax that you are going to owe by using Schedule 1 of your tax forms.
Currently if you made $43,953 or less then you are going to be paying 15% tax on this. Anything over this amount up to $87,907 you will pay 22% and it continues to go up.
Even at this point you still have not figured out just how tax you had to pay for the year, because there may be other additions or deductions that you have to complete, plus there is the provincial tax obligations that have to be calculated and attended to.
What you do have now is how much is your taxable income. Why this is important to you is because it gives you a better understanding of what your tax rate is, and with this knowledge then you are better prepared to do some tax planning.