Calculating Income Tax- Bracket 3

Lesson 2: Personal Taxes - Calculating Income Tax Bracket 3

   Constructing Knowledge

When calculating income tax on income that falls in the third tax bracket, you must make three separate calculations. You must calculate the income tax for each tax bracket separately, and then add the income tax from the first tax bracket and the income tax from the second bracket to the income tax from the third tax bracket.

Federal and Provincial Income Tax Table

Bracket	Tax Rate	Income
1	25%	the first $43 561 of income
2	32%	income over $43 561 but under $87 123
3	36%	income over $87 123 but under $135 054
4	39%	income over $135 054

Recall: The maximum income tax paid in the first tax bracket is $10 890.25.
The maximum income tax paid in tax brackets one and two combined is $24 830.09.

   Multimedia

A video describing calculating income tax when income is in the third tax bracket is provided.

EXAMPLE 1

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Simon earned $110 000 last year as an oil field environmentalist. How much income tax did he pay?

Solution

Earnings of $110 000 fall into the third tax bracket. Simon's gross pay should be split according to the tax brackets. The first bracket is $43 561 and the second is $43 562.

Step 1: Calculate how much of his earnings fall into the third tax bracket.

third tax bracket earnings	= $110 000 − $43 561 − $43 562
	= $22 877

Step 2: Calculate how much income tax is paid in each bracket.

Income tax can then be calculated by adding together the income tax from each bracket.

Income tax = first bracket tax + second bracket tax + third bracket tax
Income tax = (tax rate × first bracket pay) + (tax rate × second bracket pay) + (tax rate × third bracket pay)
Income tax = (25% × $43 561) + (32% × $43 562) + (36% × $22 877)
Income tax = (0.25 × $43 561) + (0.32 × $43 562) + (0.36 × $22 877)
Income tax = $10 890.25 + $13 939.84 + 8235.72
Income tax = $33 065.81

Simon paid $33 065.81 in income tax.

Alternate Solution

Because Simon paid the full first and second tax bracket amounts, the first and second tax bracket calculations can be skipped and replaced by $24 830.09, which is the maximum first and second tax brackets amount.

Step 1: Calculate how much of his income is in the third tax bracket.

third tax bracket earnings	= $110 000 − $43 561 − $43 562
	= $22 877

Step 2: Calculate how much income tax was paid.

Income tax	= first and second bracket tax + third bracket tax
	= $24 830.09 + (tax rate × third bracket pay)
	= $24 830.09 + (36% × $22 877)
	= $24 830.09 + (0.36 × $22 877)
	= $24 830.09 + 8 235.72
	= $33 065.81

Simon paid $33 065.81 in income tax.

EXAMPLE 2

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What is the maximum income tax paid for the first three tax brackets?

Solution

Income tax = first bracket tax + second bracket tax + third bracket tax
Income tax = (tax rate × first bracket pay) + (tax rate × second bracket pay) + (tax rate × third bracket pay)
Income tax = (25% × $43 561) + (32% × $43 562) + (36% × 47 931)
Income tax = (0.25 × $43 561) + (0.32 × $43 562) + (0.36 × 47 931)
Income tax = $10 890.25 + $13 939.84 + $17 255.16
Income tax = $42 085.25

A maximum of $42 085.25 would be paid in the first three tax brackets.




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