Net income provides a more accurate account of the financial status. Here’s why.
What is the dependent care credit?
The dependent care credit is a tax break for expenses paid to provide care for a dependent. It is most commonly used in connection with child care costs, but expenses to care for any qualified dependent are eligible. The taxpayer claiming the dependent care credit needs to show that providing care interferes with her ability to work.
The dependent care credit provides a tax credit for individuals who need to pay to provide care for their dependents. Typically, this credit helps to recoup expenses when caring for the dependent person prevents the taxpayer from working or looking for work. The Internal Revenue Service defines qualifying dependents as:
- Dependents who are children under the age of 13 for the duration of care provided.
- A spouse who is physically or mentally incapable of caring for himself, or is a full-time student, and has lived with the taxpayer for longer than half the year.
- Any individual who is mentally or physically incapable of self-care, has lived with the taxpayer for longer than half of year, and either
- Is her dependent, or
- Might have been her dependent, but has a gross adjusted income greater than the exemption amount.
As long as she has earned income that year, the taxpayer may write off expenses like hiring a caretaker or paying to send a child to summer camp or day care if those expenses allow the taxpayer to work or look for work.
Expenses cannot exceed $3,000 for one qualifying dependent or $6,000 for two or more persons. The credit does not apply to the dollar amount of any expenses above the $6,000 cap.
Putting your care expenses on a credit card? Make sure you’re getting the most cash back for your purchases.
Dependent care credit example
Tommen and Margaery have a 3-year-old son. During the year, their 3-year-old son is enrolled in day care to allow Tommen to work full time and Margaery to look for work. On tax day, they file jointly and claim the dependent care credit of $3,000, which partly covers the cost of the day care, on Tommen’s taxable wages.