Calculating Income Tax- Bracket 4

Lesson 2: Personal Taxes - Calculating Income Tax Bracket 4

   Constructing Knowledge

When calculating income tax on income that falls in the fourth tax bracket, you must make four separate calculations. You must calculate the income tax for each tax bracket separately and then add the income tax from the first, second and third tax brackets to the income tax from the fourth 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.
The maximum income tax paid in tax brackets one, two, and three combined is $42 085.25.

   Multimedia

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

EXAMPLE

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A professional hockey player earned $3.1 million in salary last year. How much income tax must he pay?

Solution

Earnings of $3 100 000 fall into the fourth tax bracket. The hockey player's gross pay should be split according to the tax brackets. The first bracket is $43 561, the second is $43 561 and the third is $47 931.

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

fourth tax bracket earnings	= $3 100 000 - $43 561 − $43 562 - $47 931
	= $2 964 946

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 + fourth bracket tax
Income tax = (tax rate × first bracket pay) + (tax rate × second bracket pay) + (tax rate × third bracket pay) + (tax rate × fourth bracket pay)
Income tax = (25% × $43 561) + (32% × $43 562) + (36% × $47 931) + (39% × $2 964 946)
Income tax = (0.25 × $43 561) + (0.32 × $43 562) + (0.36 × $47 931) + (0.39 × $2 964 946)
Income tax = $10 890.25 + $13 939.84 + $17 255.16 + $1 156 328.94
Income tax = $1 198 414.19

The hockey player must pay $1 198 414.19 in income tax.

Alternate Solution

Because the hockey player will pay the full first three tax bracket amounts, the first, second and third tax bracket calculations can be skipped and replaced by $42 085.25, which is the maximum first three tax brackets amount.

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

fourth tax bracket earnings	= $3 100 000 - $43 561 − $43 562 - $47 931
	= $2 964 946

Step 2: Calculate how much income tax must be paid.

Income tax = first & second & third bracket tax + fourth bracket tax
Income tax = $42 085.25 + (tax rate × fourth bracket pay)
Income tax = $42 085.25 + (39% × $2 964 946)
Income tax = $42 085.25 + (0.39 × $2 964 946)
Income tax = $42 085.25 + $1 156 328.94
Income tax = $1 198 414.19

The hockey player must pay $1 198 414.19 in income tax.




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