A Beneficial Tax Credit for Caregivers

03/03/2016
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Tax Credit For Caregivers:
Details about the Child and Dependent Care Credit

 

It’s tax season once again, which means it’s important to understand all the tax deductions and tax credits that are available to you, whether you’re doing your own taxes or using a tax preparer (recommended). The IRS and some states offer tax credits and other tax advantages to seniors and their caregivers. Here, we focus on the Child and Dependent Care Credit.

What’s the difference between a tax deduction and a tax credit?
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.

The Child and Dependent Care Credit
The Child and Dependent Care Credit is also referred to as the Elderly Dependent Care Credit or the Aging Parent Tax Credit. It’s a tax credit for expenses an individual or family incurs for the care of a dependent (or other qualified person) so the taxpayer(s) are free to work.

Home care or adult day care costs are examples of expenses that 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.

This tax credit can be claimed by a person who pays for an outside caregiver (e.g. home health aide, adult day care services) to look after an older relative so that they (the taxpayer) can work. An older adult does not have to qualify as a dependent for tax purposes in order for their family member to claim this credit, which can be found on line 49 of Form 1040.

However, there are a few important factors to keep in mind.

  • First, the taxpayer cannot claim this credit if the person they’re paying to care for an older adult is their own child who is under 19 years if age
  • Second, the Elderly Dependent Care Credit does not apply to money that is paid so an older adult can be cared for in a nursing home or assisted living facility
  • Third, it’s important to be aware that hiring an in-home caregiver who doesn’t work for an outside agency can have certain tax consequences in the eyes of the IRS
  • The dollar limit on the amount of the expenses you can use to figure the credit is $3,000 for the care of one qualifying individual or $6,000 for two or more qualifying individuals. The amount of your credit is between 20 and 35 percent of your allowable expenses. The percentage you use depends on the amount of your adjusted gross income. 

Certain states also offer a separate state Child and Dependent Care Credit, which is typically calculated as some percentage of the taxpayer’s federal Child and Dependent Care Credit amount. The following states allow for additional Child and Dependent Care Credits: Arkansas, California, Colorado, Delaware, District of Columbia, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Minnesota, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, and Vermont.

For more information about the Child and Dependent Care Credit, visit the irs.gov website.

 

BLOG Date: Thursday, March 3, 2016
Writer: Ryan Allen