| Tax Credits Unlike a tax deduction, a tax credit does not reduce your taxable income. Instead, it comes into effect once the amount of tax you owe has been determined. For example Let's say you owed $10,000 in federal tax. If you had a $1,000 tax credit, you would simply deduct this amount from your federal tax payable, reducing it to $9,000.
With tax credits, your marginal tax rate doesn't come into play at all. Rather, a tax credit is worth the same in real dollars to everybody, regardless of their income level and tax bracket. As part of an effort to make the tax system more fair, the government has been converting many deductions into tax credits.
Here are two examples of working with tax credits and their associated benefits:
+ The value of Refundable and Non-Refundable Tax Credits Refundable credits are always worth in real dollars what they're worth on paper. They're treated as if the money was actually paid to the government, just as when income tax is deducted from your paycheque. If you didn't have to pay that money into the system, you get it back. Non-refundable tax credits, however, may be worth a lot less than the number you fill in on your tax return, right down to zero. This can happen if a minimal income - or lots of deductions - means you'll have little, if any, federal tax to pay. The most non-refundable tax credits can do for you is to eliminate federal tax (and the associated provincial taxes and federal surtax). What they can't do is get you a refund worth more than the tax you paid. Say you had a basic federal tax payable of $2,000, and you had $3,500 of non-refundable credits. Your tax payable will be zero, but you would not get a cheque from the government for $1,500. + When a $1,000 Tax Credit is worth $1,500 or more! Most tax credits are subtracted from the amount of basic federal tax you are required to pay. Since your provincial taxes and federal surtaxes are calculated on your basic federal tax, this means each dollar of credit can actually save you upwards of $1.50 in taxes! (Your provincial taxes are calculated as a percentage of your basic federal tax, so the less tax you owe Ottawa, the less you'll have to pay your province. Provincial tax rates range from around 45 to 70 per cent of your federal tax bill. In addition, tax credits are subtracted from your basic federal tax before assessing your federal surtax, making your credits worth even more.) |