Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.
02-16-2017 01:01 PM
My wife and I had our first child last year (2016). My mother is currently watching him while my wife and I work. We are currently providing supplies (wipes, bottles, toys, milk, etc) that my mom uses while she is watching him. If my mother changed us for the supplies instead of us providing them would we be able to deduct those costs and.or use an FSA to pay for them? I read this IRS document: https://www.irs.gov/pub/irs-pdf/p503.pdf ... and it soulds like we meet all of the requiremetns.
If we can, for my mother, I see that she would have to have claim what we paid her as income and then she could dedust the cost of the supplies that she purchased as a business expense. Would everything my mom purchases to watch him be an expense that she can deduct, for example, a crib, stroller, play yard, etc?
Is this a compliant way to structure the arrangement for the best tax outcome?
05-07-2017 01:14 PM
Welcome to the H&R Block community.
Yes, you're correct that your mom would have to report any income that she earned by caring for your child. However, a parent who cares for a child is usually a household employee which means that they only pay social security & Medicare tax on everything in excess of $2,000. Your mom may or may not have to pay federal income tax depending on the overall outcome of her tax return.
If your mom does claim the income, which is required if it's over $2,000 or if she has enough other income to make it taxable for the federal income tax, then she can deduct her expenses incurred in caring for the child on her Schedule C (or on Schedule A if you pay her as a W-2 household employee). The Schedule A deduction is limited to everything above 2% of adjusted gross income.
Yes, you could also choose to use FSA funds to pay for your childcare expenses.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)