While parents often use this credit to write off childcare expenses, family caregivers can also benefit if they meet certain criteria. With this credit, 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 reduce what you owe this tax season.
As is evident by the name of this credit, the person whose care you are claiming must either be your dependent or:
- Could have been your dependent except for that their gross income either equals or exceeds the exemption amount;
- Could have been your dependent except they are filing a joint return; or
- Could have been your dependent except you (or your spouse if you are filing jointly) could have been claimed as a dependent on another taxpayer's 2015 return.
Once you have determined whether you have met the IRS' criteria to claim your parent as a dependent or one of the above equilavents, you can use the dependent care credit on your federal income tax return.
Place of Residence and Reasons for Care
In addition to dependency, your loved one must meet the following criteria to count as a "qualifying individual."
- The adult you are caring for has to have lived with you for more than half the tax year.
- The adult 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 or others.
- Their care must be 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.
Define the Type of Care Needed and Who Provides It
The definition of a care provider may be broader than you think. It can include an individual you have personally chosen to watch your elderly loved one, and it covers those whom provide care both inside and outside of the home.
- For this exemption, you can't pay your spouse, your child under 19 years of age, or someone you claim as a dependent for 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 loved one goes while you are at work. You can deduct the expenses of an eligible individual you chose to come into your home and serve as a companion or sitter.
- The care provider must be identified on your taxes through their name, address and taxpayer identification number (SSN or EIN).
- If you use an agency to place a companion or sitter in your home, then they are not considered your employee and you don't have to pay employment taxes. It's the same case if the provider is self-employed, or if they care for your loved one 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.
Determine How to Claim the Cost
- To figure the credit, you can use up to $3,000 of expenses (paid in a year) for one qualifying individual or $6,000 for two or more individuals who qualify.
- 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. 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 may reduce your credit as well.
- 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. For examples, 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, but you have to chose one, 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.