It’s already December and along with New Year’s resolutions we will be thinking about our taxes. Ideally, we already know what to expect and will have it all organized, however, we still may want a more clear idea of where we stand based on 2012 income and expenses. Some may need to set a date with their “shoebox” to make sure all is well. The earlier the better!! Estimating what we owe and budgeting for future installments along with exploring our options is easier to do when we still have the time to plan and organize our financial position. Here is a guide for 2012 to help determine your bottom line.
You’ve been working hard in your business all year long and before you know it’s almost the end of 2012, and now is a good time to figure out whether or not you’re going to owe come April 30th (for self-employed individuals the return itself is not due until June 15th). If you’ve been doing your books on a regular basis (quarterly at the minimum) then you roughly know how much money you’ve made so far this year. From that we can guestimate what you’ll owe for the year taking into account depreciation and other factors if necessary.
Estimating the taxes owing
How can you estimate your taxes owing for the current year? If you use a tax preparer, then come late January they should have a draft copy of their tax software. They can help you get a pretty good idea about what your tax situation will be come April 30th. They may charge you for doing this but in the end it would be worth it
You can also do a simple calculation by taking into account where your net income fits into the tax brackets* for 2012. The brackets for the provinces vary greatly so this calculation will be based on British Columbia’s rates (that’s where we’re based). We also took into account the basic personal exemptions for 2012: Federal $10,822 and B.C. $11,354.
Also, don’t forget CPP, which is 9.90% for the self-employed (employee and employer portions) up to a maximum for 2012 of $4,613.40.
Up to $42,707 income 20.47%
Up to $85,414 income 25.56%
Up to $132,406 income 30.66%
For example, you have a net income from your business of $67,350, which is greater than the maximum CPP level of $50,100. You fall within the middle rate of 25.56% so you’re estimated tax bill is $17,214.66 and CPP would be $4,613.40 for a total owing of $21,828.06.
Now this is just a guestimate and should not be used as a final calculation for any tax amount owing, as that will depend on many factors, such as RRSP contributions, etc. Plus we have based this calculation on just your business income. This is just a guide so you have a rough idea of what you’ll owe come April 30th.
If you owed more than $3,000 (including taxes and Canada Pension Plan for self-employed individuals) last year then you should have been making quarterly installment payments based on the amount you owed. For example, if you owed $5,200 last year, then that’s $1,300 you should have been paying quarterly. Canada Revenue Agency (CRA) has been charging penalties and interest on missed, or late, installments, so make sure that you are making those installments.
Now, if you believe your taxes owing will be less than last years, you can lower the installment payments or eliminate them if the net amount owing will be under $3,000. If you believe your taxes owing will be higher than the previous year then you can also increase your installment payment so as not to have a high balance owing come April 30th.
You could use your current tax amount owing to figure out what you should make for an installment come March 15th.
Installments are due March 15, June 15, September 15, and December 15.
Tax Brackets for 2012
15% on the first $42,707 of taxable income, +
22% on the next $42,707 of taxable income (up to $85,414) +
26% on the next $46,992 of taxable income (up to $132,406) +
29% of taxable income over $132,406.
5.06% on the first $36,146 of taxable income, +
7.7% on the portion of taxable income more than $36,146, but not more than $72,293, +
10.5% on the portion of taxable income more than $72,293, but not more than $83,001, +
12.29% on the portion of taxable income more than $83,001, but not more than $100,787, +
14.7% of the amount of taxable income over $100,787.
The Personal Tax Filing Deadline is April 30th – Some Last Minute Reminders
Need Help With Your Return? Where to Get Answers to Your Income Tax Questions
What is Income Splitting and How Can it Reduce Your Tax Bill?
Self Employed? Do You Know What Your Tax Obligations Are?
Should You Pay Yourself Salary or Dividends When You Incorporate Your Business?
What is CRA ReFile and How Does it Work?
What are Input Tax Credits?
What Happens if You File Your Income Tax Return Late