Everyone knows that the year you have a baby, you typically see a generous tax refund, but it doesn’t stop there. It is unfortunate that many parents are not aware that being a parent means that certain things can be deducted, year-after-year.
Most don’t realize that there is a difference between a deduction and a credit, but there certainly is. A credit is significantly better, because it actually reduces tax bills to the exact dollar. Therefore, if you miss one of these, it’s quite painful compared to missing a deductible that only reduces the income amount that is subject to tax.
Between 20 and 35 percent of what you actually pay for your childcare while you are working is what you can qualify for. Keep in mind though that if a childcare reimbursement account is offered where you work, this may be the better way to go. Quite often, these programs are more attractive than the tax credit. You can only do one or the other; no double-dipping is permitted !
If you employ a nanny on your own, you can take one of two options when you file your taxes. Keep in mind that if you are the hiring party and don’t go through a nanny agency, which may handle everything for you, then you have to report the nanny’s earnings, and pay taxes on their wages for you to be eligible for either of the two following tax breaks:
- Dependent Care Flexible Spending Account – This has to be offered by your employer for you to be eligible. The amounts are actually shielded from most state income taxes and all federal incomes taxes.
- Child Dependent Care Tax Credit – Under this credit, you are able to apply the initial $3,000 of expenses that you paid for a qualified dependent for nanny care so that you could work. If you have two or more children, this amount increases to $6,000.
Medical and Dental Expenses
Parents can deduce any paid medical expenses of children under 27. Yes, 27! Few parents realize that the age limit is so generous, so it’s rarely taken advantage of. Even if the child is no longer considered a dependent and not under your health coverage, if you pay for an expense, it is tax deductible.
Very few parents take advantage of this tax deductible, which is unfortunate because after all, a learning disability is considered a medical condition. This includes ADHD, autism, cerebral palsy, etc. Costs that are able to be deducted up to 7.5 percent of your adjusted gross income include:
- Special schooling or tutoring
- Aides that are required in order for a child to benefit from special or regular education
- Continued diagnostic evaluations
- Exercise programs recommended by medical professionals, which can include yoga, swimming, dance, horseback riding, etc.
- Transportation costs to and from therapy sessions, special schools, parking fees and airfare
- Diapers, if demanded by the condition
- Special safety home improvement, such as lead paint removal
- Parent conferences related to the disability
Understanding the Child Tax Credit
- Available for children under the age of 17
- Child must be son, daughter, stepchild, sister, brother, stepsister, stepbrother, foster child or descendent from any of the above
- Child must be claimed on federal tax return
- Child must be a U.S citizen, national or resident alien
- Child must have lived with you for at least half of the year
The Child Tax Credit is a really important credit because it can provide up to $1,000, depending on the qualifying child. This is certainly something you want to take advantage of.
Start your nanny career today or hire one! Visit Nanny.net for details.