Dependent Care Tax Credit

[emczekus]

I pay for child care in a non-direct way and due to this situation I would like to know if I can and how I can properly claim the Dependent Care Tax Credit.  Here is my situation: there is an in-law unit in the back of the property I live in.  My brother lives in the in-law.  We have charged previous tenants of the in-law $1125 per month.  When my brother moved in, we made an arrangement that if he could babysit regularly, then I would cover his rent.  So I have never made an actual payment to my brother for his babysitting, I have simply paid his portion of the rent, but this $1125 expense of mine is effectively for child care.  So can I claim this expense for the Dependent Care Tax Credit since I never made direct payments to my brother?  Will it just need to require my brother including this babysitting “income” when he files his taxes?

[Bsch4477]

Two issues. First, yes he has to report that bartering income on Sch C. Second, if audited you would have to show the IRS that you actually paid for the child care which might be problematic in your situation. Your arrangement might also not pass the “smell test” in that you are receiving less rent, thereby reducing your taxable income and at the same time using that phantom income to get a credit- -double dipping. It would be cleaner to just pay him directly for child care and he could then use that income to help pay for the rent. 

[emczekus]

Thanks so much for that insight! 

[emczekus]

One additional thing I actually want to clarify: I am NOT the landlord of the property and the $1125 that I’m “charging” for the in-law is NOT money that is going into my pocket (not rental income). The $1125 still goes to the landlord and I am just the middle person that sends the single rent payment for the entire property. In other words, I get the $1125 from the in-law but then I send that to the landlord in addition to the balance of the total rent (my portion). With that said, would that negate the idea of double-dipping? 

[Opus 17]

If you are providing care in your home, he is your household employee.  You are required to give him a W-2, and withhold and pay household employee tax (social security and Medicare tax) on your tax return.  This will likely offset some or all of the savings from the credit, and he will of course have to report the income on his tax return.  (How much tax he will pay will depend on all his other tax information.)

If he provides care in his home, he is self-employed and files a schedule C and must pay income tax and self employment tax.  

It would certainly be cleaner if you paid by check and kept the canceled checks as proof (or electronic draft of some kind that creates proof).  You are allowed to issue a W-2 based on the barter value of the wages (and in fact are required to do so),  but I would at least want to have a written agreement that shows a common understanding of the arrangement.  Your brother would also have to be made aware that he will be expected to pay tax, if he was thinking this would be under the table.  

[emczekus]

Thank you!