A tax credit is available for taxpayers who have incurred employment related expenses for the care of a qualifying individual. The amount of credit available is equal to an applicable percentage of the expenses paid by the taxpayer during the taxable year.
Credit Filing Requirements
In order to qualify for the dependent care credit, a taxpayer must have incurred employment related expenses for the care of a qualifying individual who resides in the taxpayer’s household for more than one half of the tax year. It is important to remember that if a married couple wishes to claim the dependent care credit, a joint return must have been filed for the tax year in which the credit is claimed. This means that the credit will be disallowed by anyone who has filed a return married filing separate.
However, if a taxpayer files head of household but is still married under state law, they will be able to take the credit because they are considered unmarried for tax purposes.
A qualifying individual for the purpose of claiming the dependent care credit is:
1. A dependent under the age of 13
2. A dependent who is physically or mentally incapable of caring for himself or herself and is residing in the same principal place of abode as the taxpayer for more than one half of the taxable year
3. The taxpayer’s spouse who is physically or mentally incapable of carrying for himself or herself and is residing at the same principal place of abode as the taxpayer for more than one half of the taxable year
An individual is physically or mentally incapable if such individual is incapable of caring for his or her hygiene or nutritional needs, or requires full time attention from another person for their own safety or the safety of others.
An individual’s inability to engage in any substantial gainful activity or to perform the normal household function does not in and of itself constitute physical or mental incapability. It needs to be shown that on a daily basis, the taxpayer is unable to care for themselves in a substantial manner.
Employment Related Expenses
The credit is available only for employment related expenses. Such expenses are the amounts paid for household and care giving expense, but only if such expenses are incurred in order to allow the taxpayer to be gainfully employed. A taxpayer’s gainful employment may consist of services within or outside the hold, which would include self employment as well.
Amount of Credit
The amount of employment related expenses is capped to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. The taxpayer is given the ability to apply the limitations for two or more qualifying individuals in unequal proportions.
In the case of divorced or separated parents, a child is treated as a qualifying individual of the custodial parent. A custodial parent is the parent that has had custody of the dependent for the greater portion of the calendar year.