Ok here's the scenario. My sister-in-law came to live with us to help take care of my wife's parents, who also live with us. We do not pay her for this work and do not charge her room and board. Her staying with us enables us to work by providing somebody to be with the elders while we're bringing home the bacon. The sister-in-law has a job now, with variable hours, and continues to live with us to make it easier for her to care for the parents - still does not pay rent. Can we claim her keep (room and board) as a medical expense we pay on behalf of the parents? And if so, how do we price it? Fair market value? Thanks.
No. You cannot claim the expenses for having your sister-in-law live there. If you claim your wife's parents as your dependents and actually pay MONEY to your SIL for their care so you could work then you could enter it as a dependent care credit. But you cannot enter her "room and board."
It sounds like you have a tough family situation that all of you are just trying to make the best of.
Q. Can we claim her keep (room and board) as a medical expense we pay on behalf of the parents?
A. No. Your sister is not a medical professional. Even if you could, you could not count "room" at all, as it is not out of pocket. You would have to track food expenses, and even that is iffy. Your sister would have to report the income as self employment income, paying social security and medicare tax in addition to income tax. Your deduction would be limited by the 7.5% rule and itemizing.
Claiming the dependent care credit might be a possibility, if your parents are your dependents. But that's limited to $6000 of expenditures (for 2 or more dependents) and has the same drawbacks as above.