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Get a 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 work? There are usually several options for double-income couples to consider.

Strategy: Don’t forget to factor in the dependent care credit (commonly referred to as the “child care credit”). This tax break is available for the costs of caring for children under age 13 while you’re gainfully employed. It can 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? The maximum credit equals 35% of the first $3,000 of qualified expenses for one child, or the first $6,000 of qualified expenses 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 reaches the 20% level for taxpayers with an AGI above $43,000. This means that most folks are limited to a maximum credit of $600 (20% of $3,000) for one child or $1,200 credit (20% of $6,000) for two or more.

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

For example, suppose you hire a housekeeper to care for your two children while you work. The housekeeper spends most of the time on normal domestic activities and also spends 30 minutes a day driving you to and from work. Because the nonwork-related portion is minimal, the entire cost of the housekeeper is eligible for the credit.

Tip: Details on the child care credit can be found in IRS Pub. 503, Child and Dependent Care Expenses.

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