Getting Started: Tax & Benefits Analysis
Income tax and government benefit clawbacks are two very important considerations within a financial plan. The Tax & Benefits Analysis chart represents your marginal income tax rate, government benefit clawback rate, and marginal effective tax rate. These are important considerations when building a financial plan.
We want to minimize income tax over the course of a plan but we also want to maximize government benefits. Because of the large number of government benefits available, and the fact that eligibility for these benefits depends on household circumstances, this can be challenging. The Tax & Benefits Analysis chart helps visualize these important considerations.
Income Tax
For example, if you were earning a quarter million or more per year you would be in the highest marginal tax bracket of 53.53% in Ontario. For every additional dollar you earned you would lose 53 cents to income tax. If you got a $1,000 raise you would lose $535 to income tax.
But because we have progressive tax rates, at lower income levels the marginal tax rate is less. If you were earning $70,000 to $75,000 per year your marginal tax rate would be 29.65%. At this income level if you got a $1,000 raise you would lose only $300 to income tax.
Government Benefit Clawback
There are many government benefits and some, like the Canada Child Benefit, CCB, and Guaranteed Income Supplement, GIS, are quite generous. These benefits have “clawback” rates. These clawback rates act like a tax rate. The more income you earn, the more your government benefits are reduced. Unlike income tax rates, these government benefit clawback rates are often the highest at lower income levels.
Clawbacks only start when your household income crosses a certain level. These income levels are different for every benefit and can even be different depending on the type of household, the age of the recipients etc.
For example, once income crosses a certain level, the Federal GST Credit will reduce the benefit by 5% of every additional dollar of taxable income. A $1,000 raise would reduce the Federal GST Credit by $50 the following year. This clawback rate acts like a tax rate, reducing cash flow from government benefits as income increases.
This chart helps calculate your benefit clawback rate. The clawback rate will change depending on income level, but also depending on your age, type of household, age of children etc. Based on your profile we calculate the expected benefit clawback year by year. Changing the year will help you explore how your benefit clawbacks change.