Nanny Tax Benefits: Save Big on Childcare Costs
Are you a working parent with a nanny? You could qualify for substantial tax savings!
Tax Breaks for Working Parents with a Nanny
Are you a working parent with a nanny? You could qualify for substantial tax savings! Here’s a breakdown of two key options to help you save on childcare costs:
1. Dependent Care Flexible Spending Account (FSA)
What It Is: A pre-tax savings account offered by many employers, specifically designed for dependent care expenses such as childcare.
2025 Limit: Up to $5,000 per year.
How It Saves: Depending on your tax bracket, you could save roughly $2,000 annually.
Key Requirement: To qualify, your nanny must be paid legally.
2. Child and Dependent Care Credit
Eligibility: Available to families where both parents work or a single parent is employed or attending school.
2024 Credit: Claim up to $3,000 in childcare expenses for one child or $6,000 for two or more.
Income Limit: The credit decreases for higher-income families, with most receiving a 20% credit on eligible expenses—equivalent to $600 for one child or $1,200 for two or more.
Filing: Use IRS Form 2441 to claim this credit.
Tips to Maximize Your Savings
1. Pay Your Nanny Legally
Ensuring your nanny is paid legally is essential for qualifying for both the Dependent Care FSA and the Child and Dependent Care Credit.
2. Know What Expenses Are Eligible
Qualifying expenses include:
Your nanny’s wages.
Taxes paid on their wages.
Backup care services.
Placement agency fees (like those from Nashville Nanny Agency).
3. Consider Combining Benefits
Depending on your situation, you may benefit from combining these two options. Here’s a general strategy to consider:
For One Child: Focus on the Dependent Care FSA.
For Two or More Children: Use the FSA first, then apply the remaining childcare expenses to the Child and Dependent Care Credit.
Important: You cannot use the same wages for both the Dependent Care FSA and the Child and Dependent Care Credit. However, if you pay your nanny more than $5,000 annually, you can apply the FSA to the first $5,000 and the leftover wages to the credit.
By understanding these tax-saving options and ensuring your nanny’s wages are paid legally, you can significantly lower your childcare costs.
Need assistance with navigating these options?
We recommend reaching out to GTM or HomeWork Solutions.