Federal Tax Credit for Elderly Dependent Care
The Child and Dependent Care Credit (also referred to as Elderly Dependent Care Tax Credit) is a tax credit for expenses an individual or family incurs for the care of a dependent or other person living with them so that the taxpayer(s) are free to work elsewhere. Home care or adult day care costs are examples of work-related expenses eligible for the Child and Dependent Care Credit Tax Credit.
Pros, Cons and Other Considerations:
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. When combined with other options, it might make the difference between home care and assisted living.
The Child and Dependent Care Credit is for expenses a family incurs paying for the care of a qualified person be that a child, spouse or an aging parent, so that family members are free to work elsewhere. It is also applicable to unemployed persons so they are able to look for work.
The Child and Dependent Care Credit name is slightly misleading because the credit can be claimed for persons other than dependents and children. It is also applicable to a person living with the taxpayer who cannot care for him/her self but does not qualify as a dependent because his or/her gross income exceeds $3,800. Qualifying persons must be identified on the tax return.
There are also restrictions and procedures regarding who can be employed to provide care. The taxpayer cannot hire another dependent such as a teenage child to provide the care,. The care provider’s name, address and tax ID number must be stated on the tax return. 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.
Twenty-five states allow tax filers to deduct a percentage of their federal Dependent Care Tax Credit from their state tax returns. Read more about this in the State Dependent Care Credits. Tax Deductions vs. Tax Credits
Tax deductions lower your taxable income. So, if your income is $50,000, and you have a $2,000 deduction, then you will pay taxes only on $48,000. Tax credits are applied to the taxes you owe. If you owe $3,000 in taxes, and you have a credit for $500, then you only have to pay $2,500. Dependent Care Tax Credit vs. Dependent’s Medical Expenses Deductions
The cost 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 ($3,000) toward a dependent care credit and the remainder of the expenses as medical expense deductions. However, this may not always be the case. It is advised to consult an eldercare financial planner to determine which approach is most advantageous for each individual family.
More information regarding the Dependent Care Credit can be found in IRS Publication 503.
Skilled Nursing and Assisted Living
The fees associated with care provided in skilled nursing facilities or at assisted living residences are not considered eligible for the Dependent Tax Credit because this care does not free the individual to be able to work. However, adult day care and home care expenses are eligible.
Be Aware That:
Being claimed as a dependent does not jeopardize one’s eligibility for Supplemental Security Income or Medicaid.
Also Known As:
- IRS Publication 503
- IRS Form 2441
- Child and Dependent Care Expenses
- Aging Parent Tax Credit
Qualifications for the Elderly Dependent Care Tax Credit
There are no age restrictions of either the tax filer or the person in need of care, in order to qualify for the Dependent Care Tax Credit.
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.
To claim the dependent care tax credit, 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 at least half of the year.
Married couples must file a joint return unless legally separated or living apart from a spouse.
Financial Status Requirements
Financial Requirements of 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 Requirements of the Dependent
To be claimed as a dependent, the dependent’s gross income cannot exceed $3,800. 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 more than half of the year.
Veteran Status Requirements
Veteran status is not a factor in claiming the Dependent Care Tax Credit.
There is no citizenship or immigration status restrictions for the Dependent Care Tax Credit. However, the qualifying person must reside with the tax filer for at least half of the year.
Expenses for Dependent Care Tax Credit must be for the care of the qualifying person in order to enable the tax filer to work elsewhere. The name, address and tax ID number of the care provider must be provided with the tax return.
Benefits of Tax Deductions of an Elderly Dependent’s Medical Expenses
Types of Benefit Payout
Dependent Care Tax Credit results in reduced overall taxes for a family, and, therefore increases disposable income, making financial resources available to be applied towards the long term of 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.
Restrictions on How Payout Can be Used
A tax deduction does not generate a direct payout. It serves only to reduce the filer’s tax liability.
Benefits Amounts & Limits
The maximum amount the Dependent Care Tax Credit can reduce the taxpayer’s overall taxes is from $600 to $1,050 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. A percentage amount, determined by your income (20% to 35%), 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.
|Adjusted Gross Income||Percentage|
|0 -- 15000
|15000 -- 17000
|17000 -- 19000
|19000 -- 21000
|21000 -- 23000
|23000 -- 25000
|25000 -- 27000
|27000 -- 29000
|29000 -- 31000
|31000 -- 33000
|33000 -- 35000
|35000 -- 37000
|37000 -- 39000
|39000 -- 41000
|41000 -- 43000
|43000 -- No limit
It is important to note that work-related care expenses in excess of the $3,000 limit can be considered as a Dependent’s Medical Expenses and can be used to reduce taxable income and therefore overall taxes as well.
Time to Receive Benefits
These tax savings would be realized once annually when taxes are filed. For those filing estimated quarterly tax payments, 25% of this amount would be realized every 3 months.
This Source Can Help For
There are no restrictions on how families can use money saved on their federal taxes.
Costs of the Elderly Dependent Care Tax Credit
There are no costs associated with receiving a Dependent Care Tax Credit.
How to Apply for the Elderly Dependent Care Tax Credit
It is not necessary to apply for tax deductions. In order to claim the credit, you must fill out Form 2441: Child and Dependent Care Expenses when you file your federal return.
It can be difficult to determine how to structure one’s expenses and choose between the available tax credits and deductions for aging parents to get the greatest tax savings. Online tax preparation services such as TurboTax Calculators and Tips
can greatly facilitate this process as they enable a tax filer to easily examine multiple scenarios and choose the best approach.