Defining "The Nanny Tax": Why and How Taxes Apply to Babysitters (& Others)

Tax Credits Can Help!

Who would have thought that reporting taxes could actually save you money? It's true! A tax credit is not a deduction; instead it directly reduces the amount of tax you owe the IRS at the end of the year. Many families find that their tax liability can be greatly reduced by anywhere from $250 to $1,200 or more per year by exploring two avenues:

      • First, check with your employer about "pre-tax flexible spending accounts." Some companies offer these accounts (sometimes called "cafeteria plans"), which allow employees to contribute a certain amount of their pre-tax salary if it will be spent on qualifying payments like child care.

      The second option is a federal program called the Child and Dependent Care Tax Credit, which can provide you with up to 35 percent of your child care costs in the form of a tax credit. To receive this credit, you must pay for child care so you can work or look for work. You'll need to your Form 1040 when you file your annual Federal tax return.
      • There are limits on maximum allowable expenses and other restrictions on both of these options according to federal law, so check to see if you qualify before banking on the extra cash.

      Want to go more in-depth? The IRS explains it directly. Get more from iVillage

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