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Are there tax breaks for dependent care? Does this apply when I hire an in-home caregiver?

There are two popular strategies that families employing nannies or senior caregivers use to minimize their personal income taxes. Many families can utilize a flexible spending plan (cafeteria plan) offered by their employer for child and dependent care expenses. Your employer’s human resources department can provide you with plan details. Another strategy is the Child and Dependent Care Credit available to many parents. This credit can directly reduce the parent’s income taxes by between $600-$2,100 a year.

These tax breaks require that you (and your spouse if filing jointly) must pass the “work-related expense test.” You (and your spouse if filing jointly) need to be employed or be a full-time student and the care must be for a qualified dependent. Additionally, the family must report and pay taxes on the nanny’s or caregiver’s wages to be eligible for either tax break.To be eligible for any childcare or dependent care tax breaks, the family has to report the wages paid to the nanny and remit the necessary employment taxes. Many families find that the tax breaks for dependent care offset the cost of the payroll taxes for the in-home caregiver, thus easing the financial burden of tax compliance.

» More Information: Tax Incentives for Dependent Care Expenses

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