Posts tagged as:

childcare expense

Ask the taxgirl: After School Care

September 16, 2009 · 3 comments

Taxpayer asks:

My child attends public school. School ends at 3 every day, but I don’t get off of work until 5 so my child attends an after school program. Can I deduct this on my taxes? Does it matter that it’s at public school?

Taxgirl says:

You’re in luck! So long as the child is a qualifying dependent, which for purposes of your scenario means your dependent child under the age of 13 (some other exceptions apply), you can deduct qualifying child care expenses. You claim the expenses as part of the credit for child and dependent care expenses.

You are only entitled to the credit if it was necessary for you to work or local for work AND you must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. Stay at home parents may not claim the credit.

The nonrefundable credit can be up to 35% of your qualifying expenses, depending upon your income, up to a maximum of $3,000 for one child or $6,000 for two or more children. These expenses must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income, if any.

It’s also important to note that these costs must be characterized as child care. If your child is staying after school merely for tutoring or another program, that would not qualify. You also can’t include the cost of food, entertainment or other “extras” in the cost of care unless those expenses cannot be easily separated from the total. It also doesn’t matter if it’s private school or public school.

To claim the credit, you need to file a federal form 1040, form 1040A or form 1040NR. You may not use a form 1040-EZ. If you file a federal form 1040 or 1040NR, you’ll also attach a form 2441.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl

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Ask the taxgirl: Autism & Special Needs Children

July 10, 2009 · 2 comments

Taxpayer asks:

My husband and I have a 4 yr old daughter diagnosed with autism (higher functioning). We are considering enrolling her in a private preschool that has a program specifically designed to help children with autism, something the public school system cannot offer. The yearly tuition is $22,000. Can any of this be tax deductible?

Taxgirl says:

This is one of those questions that feels like it should be easy but it’s not. There are a couple of options and a few restrictions. So let’s take it in pieces…

Private school tuition is generally not deductible. However, private school tuition for grades below kindergarten (i.e. preschool and daycare) is deductible if it would otherwise qualify as childcare. So to the extent that the program would qualify as childcare, the preschool tuition would be deductible until she enters kindergarten.

For grades kindergarten and above, the tuition would be deductible to the extent that you could separate the education piece from the childcare piece. This would apply if you enroll her in a full day program (usually including before or after care), for example, when the educational component stops midday.

All of that said, you may be able to take a deduction for tuition as a medical expense, assuming that you itemize. I say may because there are restrictions. The IRS allows a deduction for medical expenses for “payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body.” In some cases, this may include tuition for special schools for children with special needs if the primary reason for the school is related to the medical condition. In other words, it can’t just be that the school would be a “better” school for your child or that the school offered an extra program or certain atmosphere that you thought would be beneficial. Additionally, a doctor must recommend that your child attend the school (be prepared to back this up).

So who qualifies? The IRS has traditionally allowed tuition as a medical deduction for children who are deaf, blind or have learning disabilities. In recent years, the IRS has also allowed medical deductions for educational programs for children suffering from depression, ADD and severe effects of substance abuse. The key is whether there’s an actual medical need by the child for the specific program.

Aides and tutors hired to assist special needs children may also be claimed as medical expenses (assuming, again, that they are medically necessary).

Keep in mind that to the extent that your insurance company covers the costs of any of these treatments, you may not deduct the portion which is covered or reimbursed to you.

I hope that helps!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook!

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Ask the taxgirl: Babysitter Bonus

December 16, 2008 · 10 comments

Taxpayer asks:

My husband and I both work and we have two young children. For the last two years, we have paid a babysitter to watch our children while we are at work.

Last year, for Christmas, we gave our babysitter a pretty good sized cash gift as a thank you. When we were doing our taxes, our accountant told us that we had to report it as part of our babysitter’s pay for the year. Needless to say, she was not happy.

This year, she suggested that instead of paying her a cash bonus, we pay her rent directly, so that she won’t have to pay taxes on it. That doesn’t sound right to me. I will ask my accountant about it when we do our taxes but can you tell me if it’s true that if we don’t pay her directly that she doesn’t get taxed on it?

We want to keep our babysitter happy because we need her to stick around but I don’t want to get into trouble with the IRS either.

Thank you for your time.


Taxgirl says:

Believe it or not, I have received a bunch of similar emails this month… Not everyone is in the same boat but a number of parents are fretting about whether – and how – to report year end “gifts” to babysitters and child care providers.

First things first: gifts to employees are not really gifts. And for IRS purposes, most in home child care workers are considered employees (for more on this issue, see my prior post on the subject).

So, no matter what you want to call it (a thank you, a bonus, a perk), a gift made to an employee is compensation as far as the IRS is concerned.

And cash gifts – and cash equivalent gifts like Visa check cards or gift certificates – made to employees are always considered taxable no matter what the amount. That’s why your accountant advised you (correctly) that the cash that you gave your babysitter last year was both reportable and taxable.

An exception to this rule is giving a small non-cash gift. Small non-cash gifts, like perfume, books and DVDS, are considered de minimis as far as the IRS is concerned, and thus, not considered taxable. Gifts which are clearly not de minimis, such as an expensive trip, Wii or iPhone, are considered taxable.

I know, I know. The whole thing stinks. But it makes sense. The general idea of a gift is that you’re making it out of “love and affection” without any expectations. Of course, we know that’s not always true. Admit it. You’ve bought a crappy sweater for a not so favorite aunt before solely because you expected her to get you something in return (probably a crappy sweater). So maybe the definition is a bit flawed. But you get the picture.

In contrast, when it comes to employees, you’re making that gift (or least the IRS is going to make the presumption that you’re making that gift) because you have an expectation of something in return. In your case, you’re hoping that the babysitter will come back day after day and do a great job of watching your children. And that’s not a bad thing to have as an expectation. But it does make the case that your “thank you” to the babysitter is really an expectation of continued employment or compensation for services already performed.

Making a cash payment directly to the babysitter’s landlord – or credit card company or loan shark – doesn’t change that picture one bit. It still counts as compensation to the babysitter.

Don’t panic just yet. I know you want to keep your babysitter happy. I get that. I’m a mom. And I know when you find someone that takes great care of your kids, that means a lot. You want to keep that person around for as long as possible. But that doesn’t mean that you have to put your own financial well-being in jeopardy. As I see it, you have a few options.

1, If you want to give your babysitter a certain sum of money, and she’s not happy about paying the taxes, consider rounding up the bonus to include a little extra to pay the taxes. For example, if you wanted to give her $100, give her $120 and explain to her very clearly that you’ve topped up her gift to help her out with the tax bill. This is done quite often in the corporate world.

2, Consider giving her the week off. If she’s an hourly employee and she has the time off without pay, she may appreciate an extra day or two of rest and there are no tax consequences to you or to the babysitter. On the other hand, if you pay her a salary and you choose to compensate her for the time off (or are required to do so by law), the tax consequences to the both of you are the same as if she had worked a regular week but she gets the perk of not actually working. If you can swing some time off yourself, you could schedule some quality time with the kids, making it a win-win for everyone.

3, Consider offering her perks throughout the year to keep her happy so that she doesn’t consider a year end “thank you” as her only thank you. Order in pizza for dinner while she’s working, offer her the use of the computer while you’re away and possibly (depending on her age and experience) the use of the family car while she’s working. Take her along on fun family trips: if she’s working while she’s traveling, the cost of the trip is not taxable to her. Creating a fun working environment may ease some of tension around her compensation issues. If she feels as lucky to have you as an employer as you feel to have her as a babysitter – and she feels that you’re being fair – maybe a few extra dollars won’t matter so much.

4, Pay the rent (or the thank you) and properly report the compensation. C’mon. She’s still ahead here – a lot. If she gripes about the arrangement too much, then maybe she’s not the right babysitter for you. Don’t allow yourself to be held hostage by unreasonable demands – and it’s definitely unreasonable for her to ask you to do something that is not legitimate. Besides, if you’re paying her “under the table” (especially year after year), you’re the one that is losing out: in addition to putting yourself at risk at audit, you don’t get to take the deduction that you would otherwise be entitled to by paying her properly.

At the end of the day, you need to feel completely comfortable with the arrangement. This is someone that you trust with your children. You need to be able to rely on her to be dependable, fair and honest. That is what matters most.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook!

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