Avoiding Taxes – Don’t be stupid about it

The title of this blog is a little misleading, and I did it on purpose.  Because as an accountant I know that there are a lot of people out there that do not like (read hate) to pay taxes.  I get it.  I do not like to pay taxes either, but let’s be realistic.  If you are paying taxes it means you are making money, and if you are paying lots of taxes it means you are making lots of money.  I don’t know about you, but given the choice I would rather make lots of money and pay lots of tax than make no money and pay no tax.  If you can swing it, or if you do the right type of planning you can do both.  It is possible to make lots of money and pay comparatively less tax than you would without planning.  I will get into some techniques in another blog, but for now I want to dispel a major myth, and hopefully open a few eyes.

Myth 1

It is better to not work overtime or to not make more money because my cheque is smaller and I don’t see the money anyway.  The government just gets it all.

This completely wrong and dare I say, borderline stupid.  Yes the government will get more taxes from you.  Yes the extra income may push you into the next tax bracket.  Here is the issue.  Tax is only a percentage of what you make.  The highest tax rate in Alberta is 39%.  This is 29% federal plus 10% provincial (by the way the 39% only occurs on the portion of your income that exceeds $130,000).  For those of you who are mathematically challenged or just hate thinking about taxes, I will simplify.  For every $1 you make in the highest tax bracket you get to keep 60 cents.  So you have to ask yourself do you feel lucky (sorry just watched Clint Eastwood).  Would you rather have an extra 60 cents or zero?  At the end of the day an overtime cheque may seem small, but truth is you are making more money.  If it’s me, I will take the extra 60 cents every time.

Myth 2

Expenses are 100% deductible so I am going to spend as much as I can so I can reduce my income and not pay any taxes.

This is also totally wrong.  Nothing is ever 100% deductible.  I will say this again because I hear it way too often.  NOTHING IS 100% DEDUCTIBLE.  As stated above taxes are only a percentage of what you earn.  So depending on what tax bracket you are in you may be spending a dollar in order to save a quarter.  I don’t know about you but I would rather give the CRA 25 cents and keep the other 75 cents for myself, rather than spend it just to get rid of it.  Seems simple, keep 75 cents or give away the whole $1.

Now there are exceptions to this.  If you really, really need something for your business, or really, really want something that you can justify for your business, go for it.  If not keep your money, give the CRA their share and be happy knowing that you have extra money in your pocket.

Myth 3

If I make more money I will get bumped into the next tax bracket and have to pay way more tax.

Not true.  Everyone pays taxes in all tax brackets regardless of income.  Everyone, even if you are a millionaire, pays 15% federal tax on the first $40K that they make.  Everyone, even if you are a millionaire, pays 23% federal tax on the income they make that falls between $40K and $80K.  Everyone, even if you are a millionaire, pays 26% federal tax on income they make that falls between $80K and $130K.  Forgive me for being repetitive, but so many people think that if they make $40,005 that all of it attracts the higher tax rates, when the truth is only the extra $5 gets taxed at the next rate up.

Conclusion

The fear of paying taxes is silly and irrational.  I don’t like giving my money to the government just to watch them fritter it away, but given the choice I will happily give them a quarter, or even 40 cents, so long as I get to keep the rest.  Don’t let fear of paying tax be the main reason for making a decision.  Remember tax is only a percentage of your income, and unless you are making $130K it is a relatively small percentage.

One last thought I would like to share.  If you really don’t want to give the government your money, give some of it to charity (you get a really good tax deduction for giving and it makes you feel good to know that you are helping out those who really need it).  There are people out there that would love to be paying taxes.  Remember, if you are paying taxes, you are making money, which means you are employed.  Considering the alternatives, I will pay my taxes with a big smile on my face this year.