Under recent tax legislation, you can no longer claim personal exemptions, including ones for your children and other relatives (now through 2025). That means if you’ve been claiming an exemption for an elderly parent you support, you will no longer be able to. But you still may be able to salvage a tax benefit if a parent watches your kids so you and your spouse can work.
Consider turning your support into payment for child care. In other words, instead of giving your parent support, you may decide to pay him or her to look after the kids. This may entitle you to a Child and Dependent Care Credit.
The credit is generally equal to 20 percent of child care expenses of up to $3,000 for one child under 13 for the year, or $6,000 for two or more qualified children. So the maximum credit is $600 (or $1,200, respectively).
Here’s an example: Say that you give your mother $1,000 a month to pay her rent. She watches your two kids after school while you and your spouse are working, but you don’t pay for the child care.
Previously, you’d claim a dependency exemption for your mother if you provided more than half her annual support and she had less than the personal exemption amount in gross income ($4,050 for 2017). “Under the old law, you could not take a dependent care credit if the payments were made to a person who was your dependent, which is your mother in this example.” — Julie Strohlein, CPA
Although there are no exemptions in 2018, you can qualify for the Child and Dependent Care Credit if you switch things around. Simply pay your mom $1,000 monthly for child care when the kids go back to school in September instead of giving the $1,000 to her landlord.
The payments for the three remaining months in 2018 qualify for the Child and Dependent Care Credit. As a result, you can claim a $600 credit (20 percent of $3,000). Of course, the payments are taxable to your mother, but it’s likely she won’t owe any tax, anyway.
“If you pay $2,000 or more to any one household employee, you may also need to pay social security and Medicare taxes as the employer. You may need to pay federal unemployment tax if you pay $1,000 or more in any calendar quarter. There may also be state or local payroll tax obligations. Carefully evaluate whether the tax credit is worth the trouble of filing and paying these employer taxes.” — Julie Strohlein, CPA
Contact your Alloy Silverstein CPA for specific guidance to your individual tax planning situation.
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