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Pick up tidy tax credit for housekeeper

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in Small Business Tax,Small Business Tax Deduction Strategies

Do you need someone to watch your young kids while you and your spouse are working? There are usually several options for dual-income couples to consider.

Strategy: Factor in the dependent care credit (commonly referred to as the “child care credit” in tax circles). This tax break is available for the costs of caring for children under age 13 while you (and your spouse, if married) are gainfully employed. It can help defray your out-of-pocket child care expenses.   

What’s more, the credit isn’t limited to expenses paid to day care centers or baby sitters. For example, if you hire a housekeeper who performs other domestic services, the entire salary may qualify for the credit!

How much is the child care credit? For ­starters, it’s potentially equal to 30% of the first $3,000 of qualified expenses for one child, $6,000 for two or more children. Qualified expenses cannot exceed your earned income (if single) or the earned income of the lower-­earning spouse.

However, the credit percentage is gradually reduced, based on your adjusted gross income (AGI), until it drops to 20% for taxpayers with an AGI above $43,000. In other words, most moderate-to-high-income individuals can pocket a maximum $600 credit (20% × $3,000) for the cost of caring for one child, or a $1,200 credit (20% × $6,000) for two or more children.

The IRS says that costs for household services qualify for the credit if they are incurred at least partially for the care of the children. This includes the services of a housekeeper, maid or cook, but the amounts paid to a chauffeur or a gardener do not qualify.

If part of the expense is child-care-related and part is not, you must divide the expense. Only the portion that is child-care-related qualifies for the credit. However, you don’t have to do any long division if only a small part of the work is attributable to other purposes.

These rules may be more advantageous than you think. Following is an example provided by the IRS in Pub. 503, Child and Dependent Care Expenses.

“You pay a housekeeper to care for your 9-year-old and 15-year-old children so you can work. The housekeeper spends most of the time doing normal household work and spends 30 minutes a day driving you to and from work. You do not have to divide the expenses. You can treat the entire expense of the housekeeper as work-related because the time spent driving is minimal. Nor do you have to divide the expenses between the two children, even though the expenses are partly for the 15-year-old child who is not a qualifying person, because the expense is also partly for the care of your 9-year-old child, who is a qualifying person.”

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