This is just one of several schemes the IRS is keeping a close eye on, including another fraud involving supposed credits for social security (FICA) taxes paid over a lifetime. There isn't a credit; you get your money back when you retire, sometimes many times over, at least while the system (and the US government) remains solvent.
Thursday, February 13, 2003
Tuesday, February 11, 2003
Monday, February 10, 2003
Colleen asks: I paid a babysitter $750 last year. Is she going to get in trouble for not reporting it if I put it in for my tax credit? She is a college student who needed some cash. If you can help I would really appreciate it!
The simple answer is yes. But first, you cannot claim the tax credit on Form 2441 -- Dependent Care Expenses -- without the babysitter's Social Security number or Employer Identification Number (SSN/EIN), or otherwise reasonably identifying her. If you have not entered this information, and cannot show due diligence in trying to get it, you may be denied the credit.
This theoretically helps ensure that tax credits only go to parents who use a professional babysitter. Of course, it also tends to drive other child-care arrangements underground, in the unintended-consequences way that many government regulations do.
You can also look at it this way. The tax credit isn't worth very much to you -- at most, 30% of the expenses can be written off, or up to $225 in actual tax reduction. It does come off the taxes due, and could theoretically mean a credit paid TO you. For your babysitter, reporting the same amount as income might mean $105 or so in increased taxes. She would have to report this on Schedule C-EZ, and the self-employment tax is recaptured (essentially the equivalent of FICA -- Social Security -- for wage earners). Even if she were due credits for being a student, the tax would come off the top of that dollar for dollar. So the real question is this: Is $105 to her worth more than $225 to you?
It's probably easier to settle this sort of thing in advance, rather than after the fact. Let the babysitter know that your spending the money on her is dependent on your getting the credit; after all, it's the same as getting a 30% discount at the store. Conversely, she may realize that the tax discount means she can negotiate for a higher salary, to cover her own increased tax liability. If you're desperate for good child-care, though (and who isn't?), you may have to accept the babysitter's terms -- and reporting income they didn't want reported is a sure-fire way to end your relationship with that sitter. Caveat emptor!