There is a relatively unknown or at least underutilized program in the law that can provide some important tax benefits for those who care for their elderly or special needs relatives. The Dependent Care Assistance Program (DCAP) is a tax benefit that is often offered by employers for expenses that a person incurs for any number of things for the care of others. It is a tax credit that can be claimed by the taxpayer for expenses related to the care for qualifying individuals so that the caretaker may work. The program is similar to a Health savings account insofar as a person can sock away a certain amount of money that can be used on certain delineated services or costs.
The good thing for New Yorkers is that this tax credit is for both federal government income taxes as well as state taxes. Not all states have such a tax credit; residents of these states can only utilize the federal credit and still have to pay state taxes on the money earned and diverted into the DCAP account. Under federal tax law, the tax credit is limited by to the amount that the worker earns. New York’s tax credit calculated as a percentage of the Federal tax credit. In addition, there is a $5,250 ceiling per year on the amount that a person can put into the account. The benefit is allowed for families earning up to $120,000. If the employee utilizes a DCAP program through their work, the tax credit is reduced by the amount that use through their employer’s program.
The money can be used for practically anything for the elderly or special needs relative, including adult day care, transportation, (reasonable) entertainment costs, as long as they costs are related to your employment. In other words, if you do not need to incur the costs to be employed, you cannot claim these costs. Overnight camp or educational costs cannot be incurred, since they are not related to or required to your employment. Fellow relatives cannot be the service provider. While an employee can take advantage of an employer based program, most employers do not offer it as an additional benefit; rather most employers who have such a program allow the employee to earn their income tax free.
If there is a choice between an employer based program and taking the tax credit, it is generally best to take advantage of the employer based program. The accounting is already taken care of and while you will need to maintain receipts and invoices in either event, there is no need for additional documentation. The income earned by the wage earner is not included as taxable income on his/her W-2. On the other hand, if the caretaker starts the account him-/herself, they have to fill out additional forms and submit additional documents, in addition to keeping the receipts and invoices that they are obliged to maintain. While all of your expenses have to be incurred in the same calendar year that they were earned, the caretaker generally has an additional two to three months to submit receipts or invoices for end of year expenses.