For many families, the expenses related to the care of an adult disabled dependent can be some of the most difficult to tackle.
Since this type of care is a necessity for parents to work or attend school, it must be accounted for in financial planning. Fortunately, tax laws provide relief for families with these expenses.
If you pay for the daily care of an adult disabled dependent of any age, you may qualify for a federal tax credit of up to 35 percent of your expenses under the Child and Dependent Care Tax Credit (with certain limits).
What are the Terms of the Child and Dependent Care Tax Credit?
To qualify, your adult dependent child must be unable to care for themselves independently due to their disability. The parent or parents must have earned income.
The care must be necessary for you to work, seek employment, or attend school full-time. If you're married, your spouse must also be working, seeking work, or in school full-time (and earning income) unless they're disabled and unable to provide the care.
Does my Adult Dependent Son or Daughter Fit the Criteria?
Your child must be physically or mentally unable to care for themselves due to being deemed disabled. You can claim expenses for adult day care for dependents aged 13 and over.
Important limitations: You cannot claim adult day care costs if your dependent does not live with you for at least half the year or if you don't pay more than half the costs of maintaining the home. For example, in a divorce scenario, only the custodial parent can claim the child care credit due to the residency requirement.
Who Qualifies as a Daycare Provider?
You must select an approved care provider. Key rules include:
- You cannot use payments to another of your dependents for care. For example, you cannot claim payments to your daughter for caring for her disabled brother, unless she's no longer a dependent and turns 19 by year-end.
- You cannot use payments to the other parent of the qualifying child or your spouse.
- Daytime camps qualify as providers; overnight camps do not.
- The IRS allows daytime care because it enables parents to work or attend school during the day.
How Much Is the Child and Dependent Care Credit Worth?
The tax credit for dependent care is a percentage of your care expenditures, capped at $3,000 (one dependent) or $6,000 (two or more dependents).
Important: These caps don't equal your actual credit amount. Your credit is a percentage of these capped numbers. For example, if you spend $10,000 annually for two children's care, your credit only applies to the first $6,000.
How Does the IRS Calculate the Credit?
Your earned income (and your spouse's if filing jointly) determines your credit amount. Your credit is limited by the lesser of: your care expenses or your earned income. For example, if you earned $4,000, you can only claim $4,000 even if your childcare expenses were $7,000.
If you receive dependent care benefits through your employer, you must deduct that amount from your calculated expenses.
The credit ranges from 20% to 35% of your capped expenditures ($3,000 or $6,000). The percentage varies based on your adjusted gross income (AGI). There's no income limit to qualify, but the rate decreases by 1% for each income increment. The maximum credit is 35% for those with AGI under $15,000; it drops to 20% for those with AGI over $43,000.
File using IRS Form 2441 with your Form 1040 or 1040 NR.
When managing dependent care costs, consider other tax-advantaged savings opportunities, such as a Health Savings Account, and how dependent care planning fits into your overall financial plan. If you're expecting a new child, our guide to financially planning for a baby covers additional tax benefits and planning strategies.
Start a conversation with us to discuss how we can help with your tax planning and dependent care expenses.
