Perhaps you've heard there's a tax break available for hiring a relative to be a baby sitter. Well, yes and no. If by "baby sitter," you mean someone to watch a kid for a night, you can't write that off on your taxes. But if you mean someone to provide childcare while parents work, it depends. Some relatives don't qualify.
The baby-sitter tax break goes by the name "Child and Dependent Care Credit." It's a tax credit rather than a tax deduction, which is a sweet deal because it doesn't simply reduce taxable income; it directly reduces income tax liability. A $100 tax deduction might save a typical taxpayer $15 or $25. A $100 tax credit, on the other hand, saves the whole 100 bucks. Taxpayers can apply for the credit on up to $3,000 worth of costs for one child, or $6,000 for two or more children; the actual credit will be 20 percent to 35 percent of the eligible costs, depending on the taxpayer's income.
In general, taxpayers qualify for the Child and Dependent Care Credit if they pay someone to watch their children -- or anyone else they claim as a dependent -- while they either work or look for work. For the purposes of the credit, a fulltime student going to school counts as working. A child must be younger than 12 years old for childcare costs to be eligible for the credit; individuals 12 or older must be physically or mentally unable to care for themselves for the costs to be eligible.
Taxpayers can claim the credit for costs paid to certain relatives, but not to others. You can't claim child-care payments made to your spouse. You also can't claim payments made to the parent of the child being cared for. For example, if you or your spouse has a child from a previous relationship, and you pay the other parent to watch the child, those payments don't qualify for the credit. You can't claim payments to anyone else you claim as a dependent on your tax return. Finally, you can't claim payments to another of your children under age 19, regardless of whether that person is your dependent. Payments to your own parents, grandparents, siblings, aunts, uncles and cousins are generally allowed.
Relatives who get paid to watch the kids should be aware that if the person paying for care wants to claim the tax credit, the payments can't be "our little secret." They have to be reported to the government, which means the caregiver will probably have to report them as income. Taxpayers apply for the childcare credit using Internal Revenue Service Form 2441. On the form, the taxpayer identifies the person or organization that got paid for childcare, including the caregiver's Social Security number or Employer Identification Number, and discloses exactly how much was paid for care.
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