We are planning to bring a grandparent to our home for a month to take care of our 2 children for about 6 weeks later this year. We pay for her travel, food, and she stays in our home. Can we use the Child and Dependent care credit (35% credit on up to $6,000) to pay for these expenses? If yes, travel and food are clearer, but since we also give her space to live during that time, can we charge a portion of our rent as an expense as well?
Also, since we have a Dependent Care Savings account, lets say we have money left over, could we use that to pay for these expenses?
Lastly, is there any other tax deferral/credit mechanism to use to pay for these expenses?
No you cannot do that ... to use the credit you would need to actually pay her and she would have to claim the income on her return which would totally defeat the reason for the credit.
Well, I guess I could have her pay her own expenses and then pay her instead. Could I then deduct those expenses? And then if I pay her a fixed price amount equal to the expenses, she would also then be exempt from any taxes, right?
Is the child care necessary so that you and your spouse can work?
Only the parent that lived with the child more than half the year (custodial parent) can claim the child care credit.
Child care is "work related". It can only be claimed if the care was necessary so that you (and your spouse if married) could work. Only if the child lived with you more than half the year *and* the care was required so that you could work is it allowed. If you did not live with the child or work at the time that the care was provided then it was not necessary so that you could work and therefore is not allowed.
See IRS Pub 503.
I see a lot of red flags here that practically scream "AUDIT ME NOW! HURRY! FAST!"
"We are planning to bring a grandparent to our home for a month to take care of our 2 children for about 6 weeks later this year. We pay for her travel, food"
I see nothing deductible or of a tax benefit to anyone so far.
" and she stays in our home."
That makes her a household employee if you are paying her to watch you children, since she will live there for the 6 weeks
"Can we use the Child and Dependent care credit (35% credit on up to $6,000) to pay for these expenses?"
If you are referring to the transportation expenses incurred in getting her to your home and the food expenses incurred for you to feed her, no you can't. But if you actually pay her (as a household employee) a fair wage for providing care for your children while you and your spouse work, then those expenses paid for the childcare are valid childcare expenses.
" can we charge a portion of our rent as an expense as well?"
Nope. Rent that you pay for your residence is never deductible. In your case, weather your G-mother is there or not, you still pay the same rent and none of it is deductible now. Having someone move in with you for even a brief time for your personal convenience doesn't change that.
"Also, since we have a Dependent Care Savings account, lets say we have money left over, could we use that to pay for these expenses?"
Only what you pay for the actual daycare can be used from the DCS account. Additionally, whoever you pay it to has to report that income on their own tax return. As for you, when you file your tax return you have to provide the IRS the SSN or EIN of the person or entity you paid for the daycare services. Finally, since money deposited to an employer sponsored dependent care account is "before tax" money, it doesn't count towards any childcare credit anyway.
"Lastly, is there any other tax deferral/credit mechanism to use to pay for these expenses?"
Not really. Here's the problems for both you and the g-ma that your attempts to "beat the system" can create.
- First, you have to actually pay your grandmother for the daycare and what you pay her gets reported to the IRS, even if it comes from a tax deferred dependent care account.
- What you pay her out of that account doesn't count for squat for the dependent care credit. If you use any of the money from the DCS account for anything other than daycare expenses, then it gets taxed and you may also have to pay an additional 10% penalty for using those funds for other than their intended purpose of daycare.
- If you charge the grandmother rent, then you must report that rental income on SCH E as a part of your personal 1040 tax return. . Since you don't own your house (you pay rent if I interpret your initial post correctly) that means you can't take any depreciation. You can't depreciate that which you do not own.
- By charging the grandmother rent to live in a room that you already pay rent for, you may be in violation of your own rental contract. Just about every rental contract I've ever dealt with has a clause that does not allow the renter to sub-let the place, or any room or other space within. But it does have a provision for guests. In my own rental contracts (I have three rentals) I only need to be notified if a non-related non-family member will be staying for more than 30 consecutive days.
-Whatever you pay the grandmother for her services, she has to report it to the IRS for the income it is. If you hire her as a contractor and pay her more than $400 in the tax year, then she is required by law to file a tax return and report that self-employment income on SCH C as a part of her personal tax return. If you pay her as a household employee then you are required to withhold taxes from each paycheck if the total amount of reportable income she will earn from all sources (not just you) in the tax year will exceed $12,000. Additionally, if she has more than $12K of earned income to include self-employment income then she is required to file a tax return.
If g-ma is on social security, then if the total of all earned income plus one half of her social security income will exceed $12K, then she is required to file a tax return and it's possible that up to a maximum of 85% of her social security income would be taxable.
Overall, my advice is to not try to beat the system. You can't and won't win. Even if you pay the transportation costs to get g-ma there it will be a win-win for everyone. You have free daycare and grandmother and her grand kids get to spend 6 weeks getting to know each other. You can't put a price on that.
Yes, we both live at home with the two kids, and grandma will be watching the kids. I work full-time, my wife will work 3-days per week, grandma will be home with the baby and help with after school transitions for the 10 year old. Once she leaves, the baby goes to daycare 3 days per week and the after school transitions are a bonafide burden to our employment.
I won't say that we are not enjoying grandma's company and cooking, but this is fully legitimate child care function.
I suspect my issue may lie only in work-permitting, but I'm looking for validation here.
Thanks for the advice.
My takeaways here are:
1) I should pay her a fair wage rather than accept her free offer to watch the kids. She can then use this money to pay the expenses that we were going to pay, and we're back where we started.
2) Because I am paying child care expenses that qualifies as dependent care (unlike her plane tickets, food, and use of our apartment), I am eligible for the credit.
3) Alternatively, if I money available in my Dependent Care Savings account, I can use those post-tax-deferred funds to pay her.
4) We're talking about 4-6 weeks, she's single over 65, so she is under the threshold is well under $12k for withholding, and she makes less than $13,600 minimum filing income level even adding her home country income, so she need not file a tax return.
5) Since she is a citizen of another country, I will have to get her a work permit costing me $500. Since that is probably what the credit will be worth to me, it's not worth the trouble unless the work permit lasts at least two years and I'm sure that we'll do this at least twice in that time.
Am I taking away any conclusions you'd disagree with?
So long as you follow federal laws pertaining to household employees, and any other state and local laws, rules and ordinances if any, that may apply, then no problem. Just remember that regardless of who you pay for childcare, money used from the DCS account just flat out does not count for the childcare credit. Only money that you have paid out of pocket and already paid taxes on count for that.
To bad G-Ma didn't come before July 1st with plans to stay with you through at least new years. If she did that then she would meet the requirements for you to claim her as a dependent provided her earned income (does not include social security) for the year was less than $4,100. If anything, that would get you up to a $500 credit and would have had the potential to increase your EIC if you qualify for that.
Personally, I'd pay G-ma as a household employee out of my pocket and save the DCS money for the daycare after G-ma leaves. With the cost of daycare now-a-days and depending on the account balance, it may not be enough to cover everything resulting in additional out-of-pocket daycare expenses.