Federal Tax Credit for Elderly Dependent Care

Page Reviewed / Updated - Feb. 2014

The following information has been reviewed and is accurate for the tax year 2013, which is filed in the calendar year 2014.

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) so that the taxpayer(s) are free to work. 

Home care or adult day care costs are examples of expenses which are eligible for this credit.  The fees associated with care provided in skilled nursing facilities or at assisted living residences are not considered eligible because this care does not free the individual 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. When combined with other options, it might make the difference between home care and assisted living.

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.

Did You Know?
Twenty-five states also allow tax filers to deduct a percentage of their federal Dependent Care Tax Credit from their state tax returns. Read more about State Dependent Care Credits.

 

Dependent Care Credit vs. Dependent’s Medical Expenses

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 advisable to use a tax preparation service that allows the filer to determine which is more advantageous.

 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.

 

Qualifying
  • Age Requirements - there are no age restrictions on either the tax filer or the person in need of care (usually a dependent).
  • 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.
  • 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 at least half of the year.
  • 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) - 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.
  • Other - expenses must be for the care of the qualifying person in order to enable the tax filer to work. The name, address and tax ID number of the care provider must be provided with the tax return.

 

 

Credit Calculation and Limit

This 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.

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

35%

15000 -- 17000

34%

17000 -- 19000

33%

19000 -- 21000

32%

21000 -- 23000

31%

23000 -- 25000

30%

25000 -- 27000

29%

27000 -- 29000

28%

29000 -- 31000

27%

31000 -- 33000

26%

33000 -- 35000

25%

35000 -- 37000

24%

37000 -- 39000

23%

39000 -- 41000

22%

41000 -- 43000

21%

43000 -- No limit

20%

 

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.

 

 

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.

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.