Income Tax Credits and Other Tax Deductions

6.1  Is there any favorable tax treatment that may effectively improve my disposable income?

Canada

Yes; employed and unemployed workers may be eligible for work-related tax deductions and non-refundable tax credits. Eligibility requirements are revised annually and vary from province to province.

Some work-related expenses are considered non-taxable and may be subtracted from your gross income to determine your taxable income. At the federal level, these deductions include:

• child-care expenses incurred to earn income through employment or self-employment or to take an occupational training course;
• moving expenses to start a job or a business, or to study full-time at a post-secondary educational institution (tuition fees must be over $100);
• annual membership dues paid to a trade union or a professional association of public servants; professional or malpractice liability insurance premiums; or professional membership fees paid to maintain professional status recognized by law.

The following deductions are mainly for self-employed workers:

• payments for food, beverages or entertainment, if the expenses are incurred for the purpose of earning income from employment and if the worker was not reimbursed for the expenses by his or her employer; and
• vehicle, travel and sales expenses, if they are ordinarily required to carry on the duties of the office or employment.

In all jurisdictions, workers with dependent children are eligible for the National Child Benefit (described in question 5.1). Many of the provincial and territorial reinvestments under the NCB are delivered through the income tax systems, such as employment supplements and supplementary child benefits.

Mexico

Yes; workers may receive some non-taxable income and also are eligible for some refundable tax credits.

Among non-taxable forms of income are:

• incomes lower than the minimum wage ¹³ and incomes from overtime if they are not greater than the limits established by the Federal Labor Law;
• compensation received for job-related injuries or illnesses;
• retirement pensions and old-age pensions if they are not greater than nine times the minimum wage;
• medical expenses and funeral expenses;
• social security benefits and income from housing funds (INFONAVIT) and saving funds;
• premiums paid by employers to social security (IMSS);
• severance payments and length-of-service bonuses up to 90 times the minimum daily wage for each year of service; and
• vacation bonuses up to 15 days' pay; workers' profits share up to 15 days' pay; Sunday bonuses up to one minimum daily wage, and other bonuses up to 30 times the minimum daily wage.

Workers are also entitled to refundable tax credits. The crédito al salario (Salary Tax Credit) is one example. This tax credit varies according to your income; the lower your income, the larger your benefit. When your level of tax, after subsidies, is lower than the tax credit to which you are entitled, your employer must give you the difference in cash. This pay should be in addition to your regular wage.

Remember that this credit is a tax rebate and therefore is not considered part of your income.

United States

Yes; there are various tax credits that support workers' incomes. Some are in the form of non-taxable income, and some are non-refundable tax credits. For example, if you are 65 years or older, or if you are retired on permanent total disability, you qualify for a tax credit of 15 percent of your tax payable.

There are also federal tax credits for low-income workers with eligible children (see Appendix B). To qualify for this Earned Income Credit, you must have earned income from employment or from a business of your own. Your income must be less than $25,760 if you have one qualifying child and less than $29,290 if you have two or more qualifying children. If you do not have qualifying children but your income is less than $9,700, you can also receive the Earned Income Credit. The maximum amount of the credit changed in 1997 (see Appendix A).

Individuals may also deduct from their taxable gross income the following items:

• certain trade and business deductions, including reimbursed expenses of employees and certain expenses of performing artists;
• losses from the sale or trade of a property;
• deductions attributable to rents and royalties;
• certain deductions of life tenant and income benefits;
• pension, profit-sharing, and annuity plans of self-employed individuals;
• certain portions of lump sum distributions from pension plans;
• penalties forfeited because of premature withdrawal of funds from pension plans;
• alimony;
• reforestation expenses;
• certain required repayments of supplemental unemployment compensation benefits;
• jury duty pay remitted to the employer;
• reductions for clean-fuel vehicles and certain refueling properties; and
• moving expenses.

¹³ Since April 1996 workers with earnings three times lower than the minimum wage do not pay income tax (impuesto sobre la renta).