Tuesday, September 22, 2009

Food for Thought: Taxation

An interesting idea that was discussed to me by a friend was an alternate way to pay your taxes. The normal scenario is that a certain percentace of your wages is deducted from your paycheck that goes towards income tax and other things like EI and perhaps medical benefits.

What this does though, is allows the government to use your money for projects and investments right away and they get to see the fruits of your tax dollars down the road. This short changes yourself a bit since there is another way to do it provided you have a strong sense of responsibility and willpower. What's the answer?

Don't pay taxes.

At least not yet. What you can do instead is request your payroll department to not take deductions for income tax. Then, you deduct the money on your own and stick it someplace safe, like a high-interest savings account. What you are doing is delaying paying your income taxes until tax time (around April) at which point you will have accumulated interest that in effect reduces the total amount of taxes you have to pay.

For example, lets say you make $30,000 a year and you have to pay 20% in income tax. That's $6,000 gone! Thus rather than payroll deduct $230.77 from your pay each pay period, you instead take $230.77 and stick it in a high-interest savings account.


Jen said...

This is basically one of the benefits that comes with being self employed. GST you collect can also be shoved into a bank account until it's due (the same time as when income tax is due).

BryceGuy72 said...

On the surface, that's a good idea, but the IRS will penalize you if you pay zero taxes through out the year and then pay them all in one lump sum at the end of the year. The financial penalty for doing this will be greater than any interest-accruing account you can stash the money in for a year.