Although you want to hire the best nanny to take care of your children, this type of service doesn't come cheap. Depending on where you live, you can expect to pay around $545 or more per week for this service, and that doesn't include overtime/holiday pay or workers' compensation insurance. However, the money you pay your nannie can be deducted from her taxes, which can save you some cash. Here are two ways you can take advantage of this tax write-off.
Use a Dependent Care Account
A dependent care account (DCA) is a type of savings account where you deposit money directly from your paycheck and use it to pay for eligible services to help care for your dependents. For instance, a DCA can be used to pay for fees for preschool, school programs, and adult or child daycare.
The primary benefit of a DCA is that it's funded by pretax dollars. The money is deducted from your paycheck and placed into the account. This helps reduce the amount of income tax you have to pay during the year, because your tax burden calculated on the balance of your check after the payment to the DCA has been withdrawn. This tax break can save you up to 30 percent on the cost of dependent care.
Unfortunately, there is a limit to the amount of money that can be placed into a DCA. Married folks who file separately can place a maximum of $2,500 in this type of account, while single people, head of household, or married couples filing jointly can deposit a maximum of $5,000 per year. Additionally, the money must be used by the end of the year; otherwise you'll lose any remaining funds. Thus, you need to carefully estimate how much you'll pay for nanny services during the year and be sure to only deposit that much into the DCA.
To sign up for a DCA, visit the Federal Flexible Spending Account Program website.
Deduct Child and Dependent Care Expenses from Taxes
If, for some reason, you're eligible to get a DCA or you'd rather not go this route, the other option is to deduct nanny expenses directly from your taxes using the Child and Dependent Care Expenses form. The IRS allows families to deduct up to $6,000 per year for care services you obtain for your dependents.
To qualify for this tax credit, the individual in your care must be a child under 13, a mentally or physically disable spouse, or mentally or physically disabled individual who has lived with you for a minimum of six months and legally qualifies as your dependent.
It's a good idea to talk to a tax professional about this particular write-off because there are things that can affect the exact amount you can deduct (such as employer dependent benefits), and you don't want to get hit with an audit by writing off more than you're allowed.
For more tips on saving money on nanny services or to hire someone to help you with your dependents, contact a home care company.