Federal Tax Credits for Elderly Dependent Care Expenses

Definition

The Child and Dependent Care Credit is also referred to as the Elderly Dependent Care Credit or the Aging Parent Tax Credit. It is a tax credit for expenses an individual or family incurs for the care of a dependent (or other qualified person that can be claimed as a dependent) so that the taxpayer(s) are free to work or actively search for a job. Please note that an individual does not have to be related to the taxpayer(s) to be claimed as a qualifying person.

Home care or adult day care costs are examples of expenses that are eligible for this credit. Household services, such as cooking and housecleaning, may also be eligible expenses, given the services were, at least in part, for the dependent individual. The fees associated with care provided in skilled nursing facilities or at assisted living residences are not considered eligible. This is because individuals in this type of care reside there full time and the intended purpose of care is not to free the taxpayer(s) to be able to work.

Discussion

While a tax credit is not a source of new funds, it represents additional disposable income and can be used to reduce the overall cost of long-term care.

The Child and Dependent Care Credit name is slightly misleading because the credit can also be claimed for persons who are neither dependents nor children. For example, it applies to persons who live with the taxpayer who cannot care for themselves, but do not qualify as a dependent because their gross income exceeds $4,150. (Gross income is an individual’s total income before taxes and other deductions). Qualifying persons must be identified on the tax return.

This tax credit has restrictions and procedures about who can be employed to provide care. The taxpayer cannot hire their spouse or another dependent, such as their teenage child, to provide the care. The care provider’s name, address, and employment ID number (or social security number) must be stated on the tax return. One exception is if the person providing care is employed by a tax-exempt organization. If this is the case, only the organization’s name and address must be provided. It must also be emphasized that hiring someone to come to your home and provide care may make you a “household employer”. As a household employer, you may have to pay social security, Medicare and unemployment taxes for the employee. For more information, read the IRS Publication 926, Household Employer’s Tax Guide.

Dependent Care Credit vs. Dependent’s Medical Expenses

The cost of home care or out-of-home care, which enables the taxpayer to work elsewhere, can be applied towards a medical expense deduction or towards the Dependent Care Credit, but not to both. Usually, it is advantageous to apply these expenses up to the maximum amount toward a dependent care credit and the remainder of the expenses as medical expense deductions. (One is allowed up to $3,000 in expenses to calculate one’s Dependent Care Credit for a qualifying individual. However, if one is providing care for two qualifying individuals, up to $6,000 in expenses is allowed.) However, this may not always be the case. It is advisable to use a tax preparation service that allows the filer to determine which is more advantageous.

Qualifying

• Age Requirements – there are no age restrictions for the tax filer or those individuals who are unable to care for themselves, due to physical or mental issues. 
• Disabilities / Health Requirements – the person in need of care must be physically or mentally unable to care for him/her self. Persons who cannot dress, clean, or feed themselves, and those requiring constant attention to prevent injury, are considered unable to care for themselves. A diagnosis of Alzheimer’s or dementia does not automatically make one eligible. But most individuals with these conditions will meet this requirement.
• Family Status – it is not necessary for the person requiring care to be related to the primary tax filer. However, the qualifying person must reside with the tax filer for more than half of the year. (This more than six-month rule also holds true for a qualifying spouse). 
• Financial (for the Tax Filer) – the individual filing taxes must have earned income for the year and must pay at least half of the support for the qualifying person.
• Financial (for the Dependent or Qualified Person) – in order to be considered a dependent, the qualifying individual’s gross income cannot exceed $4,200. However, to be eligible for this tax credit, a person requiring care does not have to be a dependent. It is only required that the person cannot care for him/her self, and that he/she live with the tax filer for longer than six months.
• Other – expenses must be for the care of the qualifying person in order to enable the tax filer(s) to work or search for work. The name and social security number of the qualifying person, and the name, address, and employer ID number (or social security number) of the care provider must be provided with the tax return.
• Filing Status – in most cases, a married couple must file a joint tax return in order to claim this tax credit. In certain situations, such as if the couple is legally separated or do not live together, a separate tax return may be filed and the credit claimed.

Credit Calculation and Limit

This credit results in reduced overall taxes for a family and, therefore, increases disposable income. This makes financial resources available to be applied towards the long term care of a loved one. Tax credits are applied to the taxes owed. If you owe $3,000 in taxes, and you have a credit for $500, then you only have to pay $2,500 in taxes, making $500 available for other expenses.

The maximum amount the Dependent Care Tax Credit can reduce the taxpayer’s overall taxes is between $600 and $1,050 (for one qualifying individual) and between $1,200 and $2,100 (for two qualifying individuals), depending on the amount of the individual’s Adjusted Gross Income.

This is determined as follows. The maximum amount of work-related dependent care expenses that can be applied towards the tax credit is $3,000 for one qualifying individual and $6,000 if there are two qualifying individuals. A percentage amount (20% to 35%), determined by one’s income, is multiplied against that to calculate the tax credit. Therefore, a family with an Adjusted Gross Income of $45,000 that had at least $3,000 in work-related care expenses would receive a tax credit of $600 ($3,000 x 20%). However, should a family be caring for two elderly parents, these numbers could be doubled.

The table below shows the Percentage amount from Adjusted Gross Income ranges.

It is important to note that work-related care expenses more than the $3,000 limit ($6,000 limit for two qualifying individuals) can be considered as a Dependent’s Medical Expenses. This can be used to reduce taxable income and therefore overall taxes as well.

How to File

In order to claim this credit, you must fill out Form 2441: Child and Dependent Care Expenses when you file your federal return. To be clear, Form 2441 must be attached to Form 1040: U.S. Individual Income Tax Return. For additional information, read the IRS Publication, Child and Dependent Care Credit and the IRS Publication 503, Child and Dependent Care Expenses.