Credit for Dependent Care Expense

Credit for dependent care expense

As an alternative to the medical expense deduction, a tax credit is available for qualified dependent care expenses paid on behalf of a parent or other relative, if the expenses are incurred to enable the taxpayer (or his or her spouse, if filing jointly) to be gainfully employed or in active search of gainful employment.

The taxpayer is given a choice between the credit and the medical expense deduction, so that any amount taken as a credit cannot also be counted towards the medical expense deduction.

ELIGIBILITY FOR CREDIT

To be eligible for the dependent care credit, the individual receiving care must:

Reside in the taxpayer's household,

Be classified as the taxpayer’s "dependent" under the Internal Revenue Code, and

Be physically or mentally incapable of self-care.

The individual must be unable to care for his or her own hygiene or nutritional needs, or must need the full-time attention of another person for the individual's safety or the safety of others. An individual who is physically handicapped or mentally defective, and for such reason requires constant attention of another person, is considered to be physically or mentally "incapable of self-care."

Qualified expenses eligible for the credit include, if the care is provided in the home, the costs of a personal attendant and other household care allocable to the individual’s needs. If incurred for care provided outside the home, the expenses must be paid to an approved dependent care facility, excluding any costs of transport to the facility.

If services are provided by an outside facility, the credit is available only if the individual spends at least eight hours each day in the taxpayer's home.

Amount of the Credit

For taxpayers paying $3,000 or more in qualified expenses, the maximum amount of the credit is $1,050 (or 35% of qualified expenses). However, the credit is reduced as adjusted gross income increases, so that for taxpayers with adjusted gross income of $43,000 or more, the credit will be limited to $600.00 (or 20% of qualified expenses).

Because of these limitations on the amount of the credit, in most cases taxpayers who are eligible for the medical expense deduction will save more in tax by taking the expenses as a deduction rather than as a credit.

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DISCLAIMER

Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use and is not intended to solicit clients. Likewise, any information contained in or obtained from this web site is for informational purposes only and is not intended to be used as legal advice.

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Last Updated: 03/05/10