Do you provide financial help to an elderly relative like a parent or in-law? Even if you meet the more-than-half-support test for dependency exemption deductions, you probably won’t qualify for an exemption because of the “gross income limit.” But you may be able to do an end-run around the tax rules if the relative watches your young children while you and your spouse work.
Strategy: Turn your support into payments for child care. The amount you pay is the same.
Under the current rules, you may be entitled to a dependent care credit (commonly called the “child care credit”) for payments for watching your kids. Therefore, at least you can salvage some tax benefits from the arrangement. It’s a way of turning a tax lemon into lemonade.
Here’s the whole story: To qualify for a dependency exemption deduction for a relative who is not your child, you have to provide more than half of the relative’s support during the year, and h...(register to read more)