Many parents file for a dependent care tax credit for day care expenses for their young children, but few are aware that they may also take the credit, which can be worth up to $3,000 for each dependent, for certain adult dependents.
Unlike a tax deduction, which reduces the taxpayer’s taxable income, a credit reduces the tax paid dollar for dollar. Tax deductions often help higher earner’s more than lower earners because they are taxed at a higher rate. For instance, a taxpayer in the highest tax bracket will save between 37 and 39.6 cents for every dollar deducted, while a taxpayer in a lower tax bracket will only save between 10 and 15 cents on the dollar. Tax credits, on the other hand, reduce taxes dollar for dollar no matter what rate the taxpayer pays.
Parents may reduce their taxes for payments made for childcare expenses that are necessary for the parents to go to work, up to $3,000 per year for each child and up to $6,000 for each household. (However, parents can’t double-dip. If they are excluding dependent care benefits provided by their employer from their income, they can’t get a credit for the same expenditures.)
The credit is generally available for care provided to children under the age of 13. However, taxpayers can also receive the credit for care provided to:
- A spouse who is physically or mentally unable to take care of himself and who lives with the taxpayer for at least half of the year; or
- A dependent who is physically or mentally incapable of self-care and lives with the taxpayer for at least half of the year.
An individual is deemed eligible if as a result of a physical or mental disability she is incapable of caring for her hygiene or nutritional needs or requires the full-time attention of another person for her own safety or the safety of others.
For the purpose of this credit, a dependent must receive over half of their support from the taxpayer and must be a relative, which may include a child, parent, sibling, grandchild, niece or nephew, in-law, stepparent, stepbrother, or stepsister.
Further requirements to take the credit include the following:
- The payment must be made to a care provider who is not the taxpayer’s spouse, her own child under age 19, or a dependent of the taxpayer.
- If the taxpayers are married, they must file a joint return.
- The tax return must include the qualifying dependent’s Social Security number.
- The taxpayer must report the name, address, and taxpayer ID number for any person or company to which he paid care costs for which he is seeking a credit.
In most cases, this credit will not cover all of the care costs of a dependent child or other relative, but an extra $3,000 to $6,000 certainly can’t hurt.