Taking care of a young child or other dependent requires a tremendous amount of time, energy and money. The child and dependent care credit is available to offset the financial costs of providing this care. If you’re the caretaker for an eligible adult or a child younger than 13 and you’re not taking advantage of your maximum dependent care credit, you could be missing out on hundreds of dollars in yearly savings.
Maximizing Your Dependent Care Credit
This tax credit’s common purpose is to help working parents afford child care, but it’s not restricted to parents of kids 12 or younger. You may be eligible for the credit if you paid care expenses for any qualifying person. The IRS says that a qualifying person can be your spouse or another individual who was physically or mentally incapable of self-care and lived with you for more than half of the year. To be eligible for the credit, you must earn income and the care-related expenses you paid must have allowed you to go to work or look for work.
Provided that you, your dependent and your expenses meet all of the requirements, a credit is calculated on up to $3,000 of expenses (if you cared for one qualifying person) or $6,000 of expenses (if you cared for two or more qualifying persons). The amount of your credit depends on your adjusted gross income. For example, if you’re in the 24% tax bracket, your credit is 20% of your expenses. That would be $600 for one dependent ($3,000 X 20%), or $1,200 for two or more dependents ($6,000 X 20%). The credit percentage is higher for individuals in lower tax brackets, with a maximum of 35%. This is your actual cash savings – a credit of $600 reduces your tax bill by $600.
The dependent care credit is just one option for lowering your care expenses. Does your employer have a dependent care reimbursement plan? If so, this could be a better avenue, especially if you’re in a tax bracket higher than 20%. Here you can elect up to $5,000 in expenses to be withheld from your paycheck pre-tax from Federal, Social Security and Medicare tax. This option, however, is only available for those with children 12 years old or younger.
Are you maximizing your tax savings on your dependent care? If not, or if you’re not sure, the tax advisors at LGA can help. Contact LGA for more information or to determine if you qualify for this credit.
By Donna Martin