Dear Tax Talk,
What can I claim as a credit for a caregiver that I have for my husband? I pay all her FUTA (federal unemployment tax), vacation, Medicare and Social Security taxes, which comes to almost $10,000 per year. He is disabled and needs a caregiver while I work.
-- Shirley
Dear Shirley,
You can claim a credit for providing care to a spouse so that you can work. Alternatively, you may be able to claim the amount as a medical deduction or a combination of both.
Generally, a tax credit is more valuable than a deduction, as a credit reduces your tax bill dollar for dollar whereas a deduction reduces your tax by a fraction, known as your marginal tax rate.
However, in the case of the dependent care credit, the credit is a fraction of the amount spent for care. If this fraction is lower than your marginal rate, you may be better off claiming a medical deduction if you already exceed the threshold for medical expenses. The fraction of creditable expenses depends on your AGI, or adjusted gross income, but is at least 20 percent of up to $3,000 in care expenses. Otherwise, a combination of the two may yield the best result.
A caregiver can include a housekeeper whose primary purpose is to look after your husband while you work. You do not have to allocate the housekeeper's cost between the care given and the household chores performed. For example, the housekeeper drives you to work for 30 minutes, cooks and cleans as well as feeds and attends to your husband. All of her salary can be considered dependent care or a medical deduction. Apart from the housekeeper's salary, you can include her meals and any extra cost of lodging plus your share of payroll taxes.
Suppose the total expenditures come to $12,000 annually. You already itemize your deductions for mortgage interest and taxes and have other medical expenses that exceed 7.5 percent of AGI.
A married couple whose taxable income exceeds $67,900 in 2009 is in the 25 percent marginal tax bracket. The 15 percent tax bracket applies to income under $67,900.
When AGI exceeds $43,000, the dependent care credit is 20 percent. If your taxable income will still be greater than $67,900 after claiming all the caregiver expense, the deduction will be worth more than the credit.
If the deduction causes your taxable income to dip below $67,900, you should claim a credit for that amount up to the maximum of $3,000, while deducting the remaining amount. Note that you can't claim a credit and deduction for the same amounts (i.e., if you use $3,000 of the $12,000 for a credit, only the remaining $9,000 is deductible). Use Form 2441 to claim the dependent credit and Schedule A for the medical deduction.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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