Saturday, May 16, 2009

Taxes, Tax Breaks and Graduating

I've been contemplating the math behind graduating and getting a new job over staying in academia. Its actually an interesting dilemma when you get right down to it. See, as a graduate student you get paid roughly $20 - $30k depending on how much TA work you do, how much you get in scholarships and whether or not you have an NSERC/SSHRC grant.

Thanks to the Martin and Harper governments (mostly the latter than the former), scholarships are now 100% tax free. Moreover, with tax deductions for students on things like residence rent, university student credits and otherwise, it is relatively easy to avoid taxes altogether as a student. So if you earn $30 000, then you really do have $30 000 to spend. Deducting $5000 for yearly tuition and books and you have about $25 000 cash to spend on all the other amenities of life.

Graduate Student After Taxes/Tuition Earnings: $25 000

As a member of the workforce however, this is no longer true. You earn enough to start paying taxes, and generally your expenses will be higher. A graduate from a Masters program in Canada earns on average $60 000. This seems like a nice jump from the $25 000 that you make as a student but when you start breaking it down, it starts looking less and less promising.

First of all, lets make a few assumptions. We assume that a graduating student maintains the exact same lifestyle that he had when he was a student with the only exceptions being those necessary for his career. That is, we assume that if the graduate student lives in a crappy apartment they stay in that crappy apartment, or a similarly crappy apartment while they are working. (Yes this is unreasonable, but bear with me)

Income taxes on a yearly salary of $60 000 amount to approximately $15 000 ($10 000 federal, $5000 provincial). Canada Pension Plan and Employment Insurance then knock off an additional $2000 and $1000 respectively. So we're down to something around $47 000.

As a graduate student, a car is not necessary. Generally you'll live close enough to a university to commute in either by bus or by alternate means of transportation (ie your feet/bike). And many universities give away bus passes as part of their tuition now. Cars, not being cheap, will probably cost you something like $6000 in a year between insurance fees, car repairs and gasoline ($3000/year insurance, $40x52 weeks gasoline, $1000 repairs/year). Now you're down to $41 000.

Working Graduate After Taxes/Expenses : $41 000

Amount Gained by Finding a Job Over Staying in Graduate School: $16 000

We're still earning more than you would in university for sure. But graduating from university will bring with it a series of lifestyle changes that I assumed before would not happen. Graduates will upgrade to a nicer apartment, they'll start buying nicer things, like brand new appliances and toys. None of which is a bad thing, but its important to remember that you're really not earning that much more than you were before, despite your pre-taxes salary figures. And it can get eaten up pretty quickly. Factor in an increase in apartment rent costs from $750/month to $1200/month and that will cost you $5400 more. Maybe consider a major overseas trip once per year for your vacation, that'll cost you $1000 more at least. The list goes on and ultimately, you're living somewhat better, but not as much as you think.

The one consolation is that as a working person, your salary increases with each year that you work. Whereas a graduate student, you're pretty much stuck.

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