Caring for an elderly parent or adult dependent can be emotionally and financially burdensome. According to a study by AARP, caregivers spend an average of $7,242 per year on caregiving expenses. Thankfully, there are tax breaks available to help offset the cost of elder care.
The name of the Child and Dependent Care Credit is slightly misleading—the credit also covers taxpayers who are caring for elderly parents and adult dependents who are:
- Considered physically or mentally incapable of providing their own care, and
- Live with you for more than half the year.
If you’re a caretaker of dependents and earning income that’s below the adjusted gross income (AGI) thresholds, you can claim the Child and Dependent Care Credit when you file your 2023 tax return.
Qualifying criteria to claim parents as dependents
To qualify for credits and deductions related to caregiving, you must be able to claim your parent as a dependent. Your parent must meet these IRS requirements to qualify as your dependent:
- Have U.S. citizenship or residency, or be a resident of Canada or Mexico
- Live in the U.S. for more than half of the year
- Be single (you can’t claim a married person filing a joint return)
- Have gross income below $4,400 for the year (a portion of Social Security benefits might be included as gross income)
In addition, you must also prove that you provide more than half of their support for the year, including expenses such as food, lodging, clothing, medical care, and other necessities. Your parent doesn’t have to live with you all year as long as that parent is a qualifying relative—a relative by blood, a stepparent, or an in-law. Any other relative must have lived with you for at least half of the tax year.
You can use the IRS’ Whom May I Claim as a Dependent? tool to help you determine whether you can claim your parent.
How is the credit calculated?
The Child and Dependent Care Credit is calculated based on your AGI, the number of dependents you have, and the percentage of expenses incurred for their care. The maximum expenses and credits vary depending on the number of dependents.
Dependent tax credits for 2022
|No. of dependents||Max expenses||Max credit||Income threshold for max credit||Income threshold for partial credit|
Remember that this is a tax credit, rather than a tax deduction.
- Deduction: reduces the amount of income on which you must pay tax
- Credit: directly reduces your tax bill, dollar for dollar
How to file for the Dependent Care Tax Credit
- Fill out Form 2441: Child and Dependent Care Expenses when you file your federal return
- Form 2441 must be attached to Form 1040: U.S. Individual Income Tax Return
Factors to consider when determining the monetary value of the amount of support you provide
You’ll need to add up:
- Fair market value of the room your parent occupies in your home i.e., how much rent you could charge a tenant for the space?
- Cost of food that you provide
- Medical bills, utilities, and general living expenses paid by you
Doing the calculation
- Add up the total amount of your allowable care expenses that qualify for the credit.
- Subtract money given to you by your employer to pay care expenses or money withheld from your pay on a pre-tax basis.
- Compare your claimed expenses with your earned income and your spouse’s earned income if you’re married.
- Take the smallest of all these amounts as your allowable expenses.
- Your credit is a percentage of your allowable expenses—the higher your income, the smaller your percentage, and therefore the smaller your credit.
Tips for filing
- Qualifying dependents must be identified on your tax return
- Keep detailed records. For example, establish a record indicating that the dependent resided with you for a minimum of six months during the year.
- Retain receipts and create a written log of all relevant expenses. This will help you identify and include all eligible deductions, while also serving as supporting evidence in case of an audit.
- Keep information about qualifying caregivers at hand, including their address, employee status, social security or ITIN numbers, and the total amount that you paid them in that tax year.
- Remember that adding a dependent to your household can have various consequences, such as potential impacts on Medicaid eligibility or the expenses associated with health insurance obtained through the Affordable Care Act marketplace.
Have you considered the alternatives?
Remember, tax laws and regulations may change over time, so it’s always recommended to consult with a tax professional or refer to the latest IRS guidelines to ensure accurate and up-to-date information regarding tax credits for elder care. If you have any questions, please don’t hesitate to contact our Jacksonville-based CPA firm.
You can find more details about claiming elderly dependent care tax credits in IRS Publication 501, Dependents, Standard Deduction and Filing Information.