If an elderly parent or in-law is having trouble making ends meet, you might help him or her pay the rent or other expenses. In return, Grandma or Grandpa may gladly volunteer to watch your children while you and your spouse work.
Unfortunately, you probably can’t claim a dependency exemption for this trade-off, due to the gross-income test for dependents. But you still can reap a big tax benefit from the arrangement.
Strategy: Convert support payments into child care payments. Instead of taking care of the relative’s rent, pay him or her a reasonable amount for baby-sitting duties. Then you can claim the dependent care credit (commonly called the “child care credit”).
To top things off, you may even do better with a tax credit than you would with an extra dependency exemption.
Here’s the whole story: You’re entitled to claim the credit for qualified child care expenses of children under age 13. The credit i...(register to read more)