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Clean up on the child care credit

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in Small Business Tax Deduction Strategies

Does your housekeeper watch your young kids while you and your spouse work? You could be in line for a special tax break.

Strategy: Claim the dependent care credit (commonly called the “child care credit”) for amounts paid to the housekeeper. The credit is a dollar-for-dollar reduction of your tax bill.

Best of all, the credit may be based on the entire salary of a housekeeper who provides other domestic services.

Here’s the whole story: For starters, the credit is equal to 30% of the first $3,000 of qualified expenses for one child under age 13, or 30% of the first $6,000 for two or more children under age 13. Qualified expenses can’t exceed your earned income (if single) or the earned income of the lower-earning spouse.

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

The IRS says that the cost of household services qualifies for the credit if it’s incurred, at least partially, for the care of the children. This includes services of a housekeeper, maid or cook, but not amounts paid to a chauffeur or gardener.

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. You don’t, however, have to do the math if only a small part of the work is attributable to other purposes.

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.”

Online resource:  Find IRS Pub. 503 at

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