With the child and dependent care credit, you can claim a credit for a certain percentage (depending on your adjusted gross income) of the expenses you paid to a care provider, if the provision of care enabled you to work or actively look for work. Parents typically use the child and dependent care credit to write off childcare expenses, but family caregivers can also benefit from this tax credit if the respite care they pay for meets certain criteria.
Working caregivers face significant challenges when it comes to balancing their careers, caregiving duties and financial commitments. Don’t miss out on this opportunity to reduce your tax bill.
How Caregivers Can Claim the Dependent Care Credit
There are several different tests that a taxpayer must meet to claim the credit for dependent care expenses. Verifying your filing status is a good place to start. Generally, those who are married filing separately cannot claim this credit, but the IRS does allow for certain exceptions, which are covered in detail here. If you aren’t sure what your filing status is, use the IRS Interactive Tax Assistant Tool to find out.
Additionally, you (and your spouse if filing jointly) must have earned income during the year to claim this credit. You can find a detailed breakdown of what the IRS does and does not consider earned income here.
The following sections explain additional IRS tests for the child and dependent care credit, but do not address criteria specific to dependent children and childcare.
Determine if Your Care Recipient is a “Qualifying Individual”
In order to be a qualifying individual, the person whose care you pay for and are claiming on your taxes must have lived with you for more than half of the year and been physically or mentally incapable of caring for themselves. According to the IRS, a person who cannot perform activities of daily living (ADLs) like bathing, dressing or feeding themselves are not capable of self-care. Additionally, individuals who require constant supervision to prevent them from injuring themselves or others (such as dementia patients) are considered unable to care for themselves.
A qualifying individual who meets the two criteria above can be your spouse, your dependent, or someone who would have been your dependent except that:
- They received gross income of $4,300 or more in 2020, or
- They filed a joint return, or
- You (or your spouse if filing jointly) could be claimed as a dependent on someone else’s 2020 return.
Need a refresher on the IRS rules for claiming a dependent? Read Can I Claim My Elderly Loved One as a Dependent on My Taxes?
Identify Qualifying Work-Related Care Expenses
To qualify for this credit, the elder care expenses you are claiming must be for your qualifying individual and must allow you (and your spouse if filing jointly) to work or actively look for work.
Work can be full time or part time and can be for others or for your own business/partnership. In some scenarios, caregivers may have to figure their expenses for each day to specify which are work-related and which are not.
Elder care expenses qualify for the credit as long as their main purpose is for the well-being and protection of a qualifying individual. These expenses do not include food, lodging, clothing, education, and entertainment unless they are incidental to and cannot be separated from the cost of caring for the qualifying person. A taxpayer can count expenses for care that is provided for outside their home (e.g., adult day care or senior center services) as long as the qualifying individual regularly spends at least eight hours per day in the home.
In-home care is customizable for each client but typically includes companionship, assistance with ADLs, transportation and household services like light housekeeping and meal preparation. The IRS defines household services as “ordinary and usual services done in and around your home that are necessary to run your home.” If household services are at least partly for the well-being and protection of a qualifying person, then they meet the work related expense test and can be claimed. However, there are instances where expenses may need to be divided if some care is work related and more than a small part is for other purposes.
Work related payments to relatives who aren’t your dependents can count toward this credit as well, even if they live with you. However, you cannot claim care expenses paid to:
- A person for whom you (or your spouse if filing jointly) can claim as a dependent, or
- Your child who was under age 19 at the end of the year, even if he or she isn’t your dependent, or
- A person who was your spouse at any time during the year.
Keep in mind that if you pay a provider to care for a loved one in your home, you may be considered a household employer and responsible for paying and withholding certain taxes.
Calculate the Dependent Care Credit
To figure the credit, there is an annual dollar limit of $3,000 of work related expenses for one qualifying individual or $6,000 for two or more individuals who qualify. Furthermore, the amount of work related expenses you use to calculate your credit cannot exceed:
- Your annual earned income if you are single at the end of the year, or
- The smaller of your or your spouse’s earned income for the year if you are married at the end of the year.
Some people must use a reduced dollar limit when calculating their credit. If your employer offers a tax-deductible dependent care benefit or a dependent care flexible spending arrangement where you contribute pre-tax dollars to cover expenses, then you must subtract that amount from the appropriate dollar limit.
“People get tripped up on that a lot,” admits Melissa Labant, J.D., CPA/PFS, CFP, CGMA, director of tax policy and advocacy for the American Institute of Certified Public Accountants.
For example, say your work related care expenses for 2020 were $7,000. However, you’ve already excluded the annual maximum amount ($5,000) for a dependent care FSA from your salary, so you must lower your dollar limit by that amount. If you have two qualifying individuals (a $6,000 dollar limit) and reduce it by the $5,000 FSA funds, then only $1,000 of work related care expenses would be eligible for this credit.
Mary Beth Saylor, CPA, tax principal at Windham Brannon, an Atlanta-based accounting and consulting firm, strongly recommends maximizing the dependent care FSA option first, since you have already paid that money before taxes.
Amounts your employer paid directly to either you or your care provider for the care of your qualifying person while you work, and the fair market value of care in a daycare facility provided or sponsored by your employer reduce your annual dollar limit as well.
If you itemize your taxes and deduct medical expenses that you pay for your care recipient, tread carefully. Some expenses may qualify as both medical expenses and work related care expenses. You can claim them either way, but the same expense cannot be claimed for both a deduction and a credit.
To calculate the amount of your credit, you’ll need to multiply your work related expenses (after applying the earned income limit and any dollar limit reductions) by a percentage that corresponds with your adjusted gross income (AGI). You can find your AGI on line 11 of form 1040, 1040-SR or 1040-NR.
Continuing with the example above, say your AGI was $34,000 in 2020, so your corresponding percentage is 25%. $1,000 of allowable expenses multiplied by 25% gives you a nonrefundable credit of $250. To claim this credit, you’ll need to fill out Form 2411: Child and Dependent Care Expenses and attach it to your income tax return (Form 1040).
The following table contains the AGI-based percentages for calculating the dependent care credit for tax year 2020.
Child and Dependent Care Credit Percentages for Tax Year 2020
If your AGI is over:
But your AGI is not over:
Then the percentage is:
Get Professional Help With Tax Matters
Most people struggle to understand what they owe in taxes and how they can effectively reduce their tax bill. Family caregivers especially tend to face financial situations that are more complicated than that of the average taxpayer. If you could use some assistance filing your 2020 tax return or devising ways to reduce how much you owe next year, there is help available. Read Where to Find Free Tax Help for Seniors or contact your Area Agency on Aging to inquire about free and low-cost tax resources in your area.