When you’re still attending college or university and not make much money it’s common to end up carrying forward large amounts of tuition and education amounts. It can look like you have tens of thousands of dollars to use to reduce your income tax payable. Yet when you start working full-time you may find the tuition and education amounts get used up way more quickly than you expect: here’s why.
A Common Mistake: Thinking Education and Tuition Amounts Reduce Your Taxes Dollar for Dollar
When you see big $$$ values in your carry forward tuition and or education amounts, you may start thinking it will be years before you have to pay any income taxes. After all, if you have $40 000 in carry forwards, and you’re only making $35 000 a year, they should last a long time, right?
The government loves making it SOUND like you are getting a big deduction.
So they say things like “You can write off $500 of your child’s fitness expenses!” They don’t say “And it will get you a whopping $75 off your taxes payable!” But that’s all the $500 saves you: $75 in federal tax payable.
Your Education and Tuition amounts do no reduce your taxes payable dollar for dollar.
How Does the Income Tax Math Work for the Education and Tuition Amounts?
Let’s look at an example.
Say you earned $35 000 in 2015.
According to the 2015 Ernst and Young personal tax calculator, in Ontario, with no extra deductions, that would mean you would owe about $4 820 in tax, most of which should have been deducted by your employer.
You don’t use up $4 820 of your education amounts though to reduce this tax payable to 0.
The education/tuition amounts are converted into credits at a really low percentage.
Line 23 (also called 323) on your Federal Schedule 1 is the amount of the education/tuition claim you are using up.
As you can see further down on Line 32 you apply a rate of 15% to that amount.
So to negate $1000 of tax owing, you have to use up $6 667 of your education/tuition amount.
To reduce your $4820 of tax owing to 0, it will use up $32 133 of your carried forward education and tuition amounts.
You would then get a tax refund of up to $4820 depending on the amount of tax that was with-held from your pay cheques and your other deductions and credits.
Don’t You Wish the Education and Tuition Amount WAS Applied $ for $ Against Your Taxes Owing?
If the education and tuition amounts were applied $ for $ against your taxes owing, it would be great, because it would mean the government was paying for your schooling.
Unfortunately, they are only willing to pay for 15% of your schooling. (Plus a bit more if your province gives you a tax break on your provincial taxes.)
- Should I Wait to Claim My Tuition Fees Until I’m Earning More Money Per Year?
- Review of Studio Tax 2013 for a Student and a Parent Claiming Tuition, Education and Textbook Amounts (T2202A)
- Review of GenuTax Standard 2013 for a Student and a Parent Claiming Tuition, Education and Textbook Amounts (T2202A)
Did you get a great tax refund the first year you worked after finishing college or university? Don’t you wish you could get a refund like that again? Please share your views with a comment.