Tax Day - Monday, April 17, 2017

Tax laws can impact caregivers of loved ones. The dependent care credit allows you to claim up to 35% of your qualifying expenses (depending on your adjusted gross income) on your federal income tax return.

Tax time can feel overwhelming when you are also caring for a parent, spouse, or other family member. This guide explains the basics you should know about the dependent care credit and other tax items that often affect caregivers. Keep this as a checklist as you gather records and talk with a tax preparer.

Who may qualify for the dependent care credit

The credit is designed to help people who pay for care so they can work or look for work. In general:

• The care must be for a qualifying person, such as a dependent who cannot care for themselves. That usually means the person needs help with daily activities or has a disability.
• The care must allow the taxpayer to work or seek work. If the care would not be necessary without the taxpayer's employment, it may qualify.
• The taxpayer and any spouse must report earned income for the year, unless one spouse was a full-time student or disabled.

If you are unsure whether the person you care for meets the definitions, talk with a tax preparer or check guidance from the tax agency. Rules can be specific about who qualifies.

What expenses may count

Qualifying expenses are generally those paid for care that enables you to work. Examples include in-home care, adult day services, and some day programs. Expenses solely for household tasks, like lawn care or housekeeping, do not usually qualify unless they are part of a care plan for the dependent.

Keep in mind:

• Payments to a licensed facility or an individual caregiver may qualify if the services are care-related.
• Payments to someone you can claim as a dependent do not qualify.
• Overnight nursing home or long-term residence fees may include qualifying and nonqualifying portions. Only the care portion may be eligible.

Because situations vary, think about why the expense was paid. If the main reason was to enable you to work, it is more likely to count.

Records to keep and how to claim

Good records make filing easier. Save all receipts and bills related to care. Note dates, the type of service, and the name and tax identification of the caregiver or facility.

When you file, you will be asked to identify the care provider and report the total amount paid for qualifying services. Many tax returns have a specific place to report dependent care expenses. If you use a tax preparer, bring your receipts and any statements from facilities.

Suggested records to keep:

• Names, addresses, and tax ID or Social Security numbers for paid caregivers or facilities.
• Itemized receipts that show dates and services.
• Statements from adult day programs or care facilities that separate care fees from room and board.
• A record of why care was needed, such as a brief note from a doctor if the dependent has a medical condition.

Keep copies for several years in case of questions from the tax agency. Electronic copies are fine if they are clear and backed up.

Other tax considerations for caregivers

The dependent care credit is not the only tax matter caregivers may face. Consider these items as you prepare your return:

• Medical expense deductions. Some out-of-pocket medical costs can be deducted if you itemize. This can include certain care-related expenses. Only the portion that meets the tax law's definition of medical expense is relevant.
• Claiming someone as a dependent. Whether you can claim the person you care for as a dependent affects several tax benefits. The rules cover residency, income, and support provided.
• Tax treatment of long-term care insurance. Payments for long-term care insurance and benefits from such policies may have special tax rules.
• Paying a caregiver. If you hire someone as a household employee, you may have payroll and tax responsibilities. Small home-care businesses and independent contractors are treated differently. There are rules about taxes you may need to withhold or report.

Because tax treatment can be complex, it is often helpful to discuss these items with a qualified tax preparer. Bring documentation and be ready to explain the caregiving situation.

Practical tips for smoother filing

• Start early. Gather receipts and statements well before filing day.
• Keep a simple file for caregiving expenses. Include dates, providers, and amounts.
• Ask for written statements from care facilities that separate care fees and other charges.
• If a caregiver is paid in cash, still get a signed receipt and the caregiver's tax information if possible.
• When in doubt, consult a tax professional who has experience with caregiving issues.

Tax rules can help ease some of the financial burden of caregiving. Careful record keeping and a clear understanding of what counts as qualifying care will make filing easier and help you get the benefits you are due.