Once you have determined whether you have met the IRS' criteria to claim your parent as a dependent, you can use the dependent care credit on your taxes.
This credit can be applied to your federal income tax return. You can claim up to 35 percent of qualifying expenses (depending on your adjusted gross income), so you don't want to miss out on this opportunity to lower your income taxes.
Need to know 1: Reasons for care
- The adult you are caring for has to be living with you (for more than half the year), according to the IRS.
- Your parent has to be mentally or physical incapable of caring for themselves. This includes people who can't feed, dress or clean themselves, or who, without constant attention, may injure themselves.
- The care is needed so you can work or look for a job (and can show taxable income). This is also the case for your spouse, if you are married and filing jointly.
Need to know 2: Type and provider of care
- The definition of a care provider may be broader than you think, because it can include an individual you have personally chosen to watch your elderly loved one. You can't pay your spouse, another parent or someone you claim as a dependent for the care.
- A care provider can be a social services agency, home health care service or other care provider who brings someone into your home.
- It also can be an adult or senior care facility where your mom or dad, or another dependent, goes while you are at work.
- You can deduct the expenses of an individual you chose to come into your home and serve as a companion or sitter.
- The provider of care must be identified on your taxes.
- If you use an agency that places a companion or sitter in your home and is in charge of them, the worker is not your employee and you don't have to pay employment taxes. It's the same case if the individual is self-employed, or if the individual cares for your dependent at their home or place of business.
- If you pay for someone to come into your home as an employee, you may have to pay a host of taxes, including Social Security, Medicare, federal employment and federal income tax withholding.
Need to know 3: Claiming the cost
- To figure the credit, you can use up to $3,000 of expenses (paid in a year) for one dependent, or $6,000 for two or more individuals who qualify as dependents. The IRS provides a chart for determining the amount of the credit.
- If your employer offers a tax-deductible dependent care benefit, or a dependent care FSA where you contribute pre-tax dollars to cover expenses, that will reduce your dependent care credit deduction. "People get tripped up on that a lot," says Melissa Labant, a CPA and technical manager for the American Institute of CPAs.
- Don't double dip. If you've already claimed the $5,000 for the dependent care FSA, you have to lower your dependent care credit by that amount. The dependent care credit allows you to claim up to $6,000 for two individuals, so only $1,000 would be eligible for this credit.
- Use the dependent care FSA option first, since you already have paid that money before taxes, recommends Mary Beth Saylor, CPA and tax principal with Windham Brannon, an Atlanta-based accounting firm.
- Some expenses for the care of dependents may qualify as work-related expenses and also as medical expenses – you have to chose one, but not both.
- Other expenses that you can deduct include the cost of meals someone eats in your home because of their employment or additional costs for rent, mortgage or utilities if someone lives with you to care for your parent.