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Tax Deductions

The more money you make, the higher your tax bracket - and the more you pay in income tax. Thus, when it comes to tax deductions, the higher your tax bracket, the more a deduction is worth to you. (Deductions are expenditures that can be used to reduce your overall taxable income for tax-saving purposes. Examples include RRSP contributions, alimony, child care expenses and union and professional dues.)

For example

If you were in a lower marginal tax bracket of 21% and had a $2,000 deduction for moving expenses, you could deduct that amount from your income before your taxes were calculated. The savings to you would be the tax you would otherwise have had to pay on that $2,000, which amounts to $420.

Now let's imagine that you're in a much higher 50% marginal tax bracket. That same $2,000 deduction would be worth $1,000 in tax savings. In short, a deduction saves you exactly the amount of the deduction multiplied by your marginal tax rate.

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