You once lived in a world where the only inevitabilities were death and taxes. Now your new baby has added a whole bunch more inevitabilities. For instance, they’ll absolutely ruin something that you love (say goodbye to that mint Salt n’ Peppa cassette single). Also, they’ll make you cry at some point (even if it only comes from being whacked in the jewels). Finally, they’ll actually make the inevitability of taxes way more bearable. Which brings another famous saying: “One inevitability washes the other.” Okay, no one has probably ever said that.
But the tax thing only works if you work it. So it’s time to cut through a teeny tiny portion of the weeds that make up the American tax code and learn how your little tax haven can start earning their keep.
An Exemption From The Rule
In 2016 you get a $4,050 tax exemption for every little sucker you have who is depending on your care. An exemption reduces your overall taxable income, which is a nice situation to find yourself in.
However, if you’re pulling down a fat salary, you’ll start seeing this exemption shrink. If you’re making more than around $430,000 the exemption will be as dust in the wind. Make yourself feel better firing and the re-hiring your nanny. Because you can.
You’re Finally Getting Some Credit
But the fun doesn’t stop there! Your friends at the IRS know what a pain in the ass it is to pay taxes with kids around — what with the noise, the mess and the stress. So they decided to let you reduce your income tax by $1,000 for every kid you have making the task impossible. (Actually that’s probably not the reason behind the credit, but whatever.)
Again, this credit is capped. And you’re married and filing a joint return, you can’t claim this one if you earn over $110,000. Sadly you likely have no nannies to fire. Maybe hire and fire a babysitter instead?
Dependent Care FSA and Credit
Now here’s where things get a little tricky. But the gist is this: the IRS allows a dependent care tax credit up to $3,000 for a single kid under 13 years old, or up $6,000 for 2 or more. You’ll be needing a Form 2441 to figure it out (or pay someone else to do it). The credit covers stuff like child care, babysitting, cleaning services and that kind of crap. This is great if you don’t have an employer that offers a Dependent Care Flexible Savings Account (FSA).
However, if you can access a Dependent Care FSA, you should totally use it. What it does is allow you to make pre-tax contributions to a savings account in order to reimburse qualified caregivers. Think daycares and whatnot. But it has a contribution limit of $5,000. Note that you can’t also take the aforementioned dependent care tax credit for the same expenses (unless you enjoy being audited).
Here’s the neat trick though: if you happen to have 2 kids, that credit has a $6,000 maximum. And you CAN use the tax credit for anything beyond what you covered with the FSA. So, you’re welcome for finding that extra $1,000 you would have just left laying around.
Now go take your family out to dinner, like the smart-as-hell head-of-household you are, and try not to stress about all those other inevitabilities for awhile.