Objectives and Description of Dependent Care Tax Credit

Objectives and Description of Dependent Care Tax Credit 1

The eligible dependent credit is a federal non-refundable tax credit designed to take into account the fact that a “taxpayer who does not have a spouse or common-law partner, but who provides support of a young child, parent, grandmother, grandfather or another dependent due to mental or physical impairment is less able to pay the tax that a taxpayer with the same income and without such dependents.

For the 2019 taxation year, the cost of the credit for an eligible dependent is estimated at $ 995 million. For the 2016 taxation year, approximately 955,000 individuals claimed this credit. Women (84%) were significantly more likely than men (16%) to request it

Parameters and calculation

The eligible dependent care tax credit is available to an individual who, at any time in the year, does not have a spouse or common-law partner, who supports a dependent and who lives with that dependent. An eligible dependent may be a parent or grandmother or grandfather who lives with the individual and for whom the individual is dependent, as well as a child, grandchild, brother or sister who lives with the individual and who is either under the age of 18 or who is fully dependent due to a mental or physical impairment.

The eligible dependent credit is equal to the product of multiplying the base rate for the year by the amount for an eligible dependent ($ 12,069 for 2019). The maximum value of the credit for the 2019 taxation year for a state’s individual, taking into account the abatement for residents of California is $ 1,512. The amount for an eligible dependent is reduced by the dependent’s net income at the rate of one dollar for each dollar earned.

Only one person can claim this credit for the same dependent. It cannot be shared and it is possible to claim only one amount for an eligible dependent per unit. Aside from the year of separation, the individual must not have paid support for the eligible dependent. If the dependent of the individual has a mental or physical infirmity, an amount of $ 2,230 is added to the amount for an eligible dependent. The dependents tax credit therefore goes from $ 12,069, if the dependent is not disabled, to $ 14,299 if the dependent is disabled.

On December 9, 2019, the federal government made changes to the Income Tax Act which will increase the amount for an eligible dependent as of 2020. For individuals whose net income for the year is less than or equal to the amount from which the 29% tax rate applies ($ 150,473 for 2020), the amount for an eligible dependent will increase to $ 13,229 for 2020, $ 13,808 for 2021, $ 14,398 for 2022 and $ 15,000 for 2023. The amount will be indexed after 2023. For individuals whose net income is greater than the amount above which the 29% tax rate applies ($ 150,473 for 2020), the increase in the amount for an eligible dependent will be phased out so that the amount for Eligible charge for individuals whose income is above the threshold of the following tax bracket ($ 214,368 for 2020) remains unchanged ($ 12,298 for 2020).

Illustration of measurement

The following graph illustrates the value of the eligible dependent credit based on the individual’s net income. If the income is zero and the dependent does not suffer from a mental or physical impairment, the maximum value of the credit is $ 1,512. The credit is reduced by the same amount as the income of the eligible dependent. The credit is reduced to $ 0 when the income of the eligible dependent reaches $ 12,069. If the income is zero and the dependent suffers from a mental or physical impairment, the maximum value of the credit is instead $ 1,791. The credit is also reduced by the same amount as the income of the eligible dependent. The credit is reduced to $ 0 when the income of the eligible disabled dependent reaches $ 14,299.

Measurement history

The eligible dependent credit originates from an exemption that existed before the 1987 tax reform. It has existed in its current form since the 1988 taxation year. From 1988 to 2006, the eligible dependent credit was less than the basic personal amount and it was reduced from a net income threshold applicable for the taxation year. Budget 2007 introduced two changes: first, the credit was set at the same amount as the basic personal amount; then the income threshold was eliminated and, as a result, the first dollar of net income reduces the amount for an eligible dependent by one dollar. These changes came into effect as of the 2007 taxation year since 2007.

Starting in 2020, the amount for an eligible dependent will be gradually increased over 4 years. Thus, it will increase to $ 13,229 for 2020, $ 13,808 for 2021, $ 14,398 for 2022 and $ 15,000 for 2023. The amount will be indexed after 2023. For individuals whose net income is greater than the amount from which the 29% tax rate applies, the increase in the amount for an eligible dependent will be phased out so that the amount for an eligible dependent for individuals whose income is above the upper tax bracket will remain unchanged and continue to be indexed.

 

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