25.8 Expenses Qualifying for the Dependent Care Credit
If you do not receive tax-free dependent care benefits from an employer’s plan, you may take into account up to $3,000 of the following types of expenses paid in 2012 when figuring the credit for one dependent, or up to $6,000 for two or more dependents. If you receive employer-financed dependent care, tax-free reimbursements reduce the $3,000 or $6,000 base.
1. Costs of caring for your qualifying child under age 13, incapacitated spouse, or incapacitated dependent (of any age) in your home (25.7). If you pay FICA or FUTA taxes on your housekeeper’s wages (38.3), you may include your share of the tax (employer) as part of the wages when entering your qualifying expenses. Also include your housekeeper’s share of FICA tax if you pay it. Note that these taxes may more than offset your allowable credit.
The manner of care need not be the least expensive alternative. For example, where a grandparent resides with you and may provide adequate care for your child to enable you to work, the cost of hiring someone to care for the child is still eligible for the credit.
2. Ordinary domestic services in your home, such as laundry, cleaning, and cooking (but not payments to a gardener or chauffeur) that are partly for the care of the qualifying person. Expenses for the dependent’s food, clothing, or entertainment do not qualify. Food costs for a housekeeper who eats in your home may be added to qualifying expenses. Extra expenses for a housekeeper’s lodging (extra rent or utilities) also qualify.
3. Outside-the-home care costs for a child under age 13, as in a day-care center, day camp (including a specialty camp such as a computer or soccer camp), nursery school, or in the home of a babysitter. Outside-the-home care costs also qualify if incurred for a handicapped dependent, regardless of age, provided he or she regularly spends at least eight hours per day in your home. However, the cost of schooling in kindergarten or higher does not qualify for the credit. Costs for sleep-away camp also do not qualify for the credit.
You may not take into account your transportation costs in taking your qualifying person to and from a care center, or your payment of a care provider’s transportation to and from your home.
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Filing Tip
Day-Care Center or Nursery School
The amount you pay to a day-care center or nursery school for a dependent child under age 13 is eligible for the credit, even if it covers such incidental benefits as lunch. However, tuition for a child in kindergarten or higher is not taken into account. If the dependent is not your child, costs for care outside the home qualify only if the dependent regularly spends at least eight hours per day in your home. Up to $3,000 a year of outside-the-home care expenses may be taken into account in figuring the credit for one dependent, and up to $6,000 for two or more.
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Payments to relatives or dependents.
No credit may be claimed for payments made to persons you may claim as your dependents (21.1). Thus, if you pay your mother to care for your child and you cannot claim your mother as a dependent, such payments qualify for the credit.
No credit may be claimed for payments to your child who is under 19 years of age at the close of the tax year, whether or not you may claim the child as a dependent.
Allocating expenses when employed less than an entire year.
If your dependent care expenses covered a period in which you worked or looked for work only part of the time, you must allocate the expenses on a daily basis to determine the work-related portion. However, if you were away on vacation or missed work due to illness for a short period (generally two weeks or less according the IRS), this is treated as a temporary absence from work and the expenses incurred during the absence qualify for the credit.
EXAMPLE
You are employed or look for work for only two months and 10 days. Monthly care expenses are $300. Eligible care expenses amount to $700 ($300 × 2 months, plus 1/3 of $300).
Employer-financed dependent care reduces credit base.
Tax-free reimbursements under an employer’s dependent care program reduce the $3,000 or $6,000 credit base. For example, if you have one child and you receive a $1,500 reimbursement of child-care costs from your company’s plan, the amount eligible for the tax credit is reduced to $1,500 ($3,000 − $1,500). A reimbursement of $3,000 or more would bar any credit. The $6,000 credit expense limit for two or more dependents is similarly reduced by dependent care benefits from your employer. On your Form W-2, your employer will report the amount of tax-free reimbursement (3.4).
If your employer’s plan allows you to fund a reimbursement account with salary-reduction contributions that are excluded from taxable pay (3.14), reimbursements from the account are considered employer-financed payments that reduce the $3,000 or $6,000 credit base. In deciding whether to make salary-reduction contributions, you should determine whether the tax-free reduction will provide a larger tax savings than that provided by the credit. You may find that the salary reduction provides the larger tax savings, taking into consideration not only the decrease in federal income tax, but also the Social Security tax and state and local taxes avoided by using the salary reduction. Further, by lowering your adjusted gross income, a salary reduction may enable you to claim a larger IRA deduction if you are subject to the deduction phase-out rule (8.4), or a larger deduction for miscellaneous itemized deductions subject to the 2% floor (19.1).
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Care Costs Qualifying as Medical Expenses
Care costs, such as a nurse’s wages, may also qualify as medical expenses, but you may not claim both the dependent care credit and the medical expense deduction. If you use the expenses to figure the credit and your care costs exceed the amount allowed as dependent care costs, the excess, to the extent it qualifies as a medical expense, may be added to other deductible medical costs.
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Allocation if expenses cover noncare services.
If a portion of expenses is for other than dependent care or household services, only the portion allocable to dependent care or household services qualifies. No allocation is required if the non–dependent care services are minimal.
EXAMPLES
1. A person accepts a full-time position and sends his 12-year-old child to boarding school. The expenses paid to the school must be allocated. The part representing care of the child qualifies; the part representing tuition does not.
2. A full-time housekeeper is hired to care for two children, ages 9 and 12. The housekeeper also drives the mother to and from work each day. The driving takes no longer than 30 minutes. No allocation is required because the non–dependent care services of chauffeuring are minimal.
