Paying for day care is one of the biggest expenses faced by working adults with young children, a dependent parent, or a child with a disability, but your clients need to know that there is a tax credit available to help working caregivers defray the costs of day care (called "adult day care" in the case of the elderly).
In order to qualify for the tax credit, the taxpayer must have a dependent who cannot be left alone and who has lived with them for more than half the year. Qualifying dependents may be the following:
- A child who is under age 13 when the care is provided
- A spouse who is physically or mentally incapable of self-care
- An individual who is physically or mentally incapable of self-care and either is the taxpayer’s dependent or could have been the taxpayer’s dependent except that his or her income is too high ($4,150 or more) or he or she files a joint return.
Even though individuals can no longer receive a deduction for claiming a parent (or child) as a dependent, your clients can still receive this tax credit if their parents (or other relatives) qualify as a dependent. This means the caregiver must provide more than half of the relative's support for the year. Support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Even if the caregiver does not pay more than half the parent's total support for the year, the individual may still be able to claim his or her parents as dependents if the individual pays more than 10 percent of the parent's support for the year, and, with others, collectively contributes to more than half of the parent's support.
The total expenses that can be used to calculate the credit is $3,000 for one child or dependent or up to $6,000 for two or more children or dependents. So if the taxpayer spent $10,000 on care, they can only use $3,000 of it toward the credit. Once taxpayers know their work-related day care expenses, to calculate the credit, they need to multiply the expenses by a percentage of between 20 and 35, depending on their income. (A chart giving the percentage rates is in IRS Publication 503.) For example, if someone earns $15,000 or less and has the maximum $3,000 eligible for the credit, to figure out the credit he or she multiplies $3,000 by 35 percent. If an individual earns $43,000 or more, he or she multiplies $3,000 by 20 percent.
The care can be provided in or out of the home, by an individual or by a licensed care center, but the care provider cannot be a spouse, dependent, or the child's parent. The main purpose of the care must be the dependent's well-being and protection, and expenses for care should not include amounts paid for food, lodging, clothing, education, and entertainment.
To get the credit, taxpayers must report the name, address, and either the care provider's Social Security number or employer identification number on the tax return.