Although child care is never deductible, the Internal Revenue Service rules do provide for a tax credit for these expenses. And credits are more valuable than deductions, as they reduce your tax liability dollar for dollar. In theory, grandparents would be able to claim the credit for the care of a grandchild or another dependent. Yet several conditions attach to this tax break that make it less likely that a helpful grandparent would see any relief under the tax rules.
In order for a grandparent to claim childcare as a qualifying deductible expense, their grandchild must qualify as their dependent under federal IRS guidelines.
The Dependent Test
Many grandparents contribute to the care of children, but the IRS imposes several "tests" on anyone attempting to claim the child and dependent care credit. One test is that the child for whom you're paying expenses must be your dependent. To be your dependent, the child must live with you at least half of the year and meet other qualifications, such as having a lower income than you and not being claimed on someone else's return.
Evaluating Work Expenses
Some grandparents can claim their grandchildren as dependents, but IRS tests for the child-care credit don't end there. In addition, the care provided must be necessary for the grandparent to seek or hold a job. A retiree who is not actively looking for work would not qualify for the credit even for the care of a dependent.
Other Child Credit Hurdles
The IRS only allows the credit if you're paying child-care expenses to a nondependent; parents of the child and your own spouse don't qualify. You must have earned income during the year, and this does not include Social Security benefits, interest, dividends, annuities or pensions. You must file a joint return if you're married. In addition, the IRS requires that you identify the child-care provider on your tax return. If you plan to take the child-care credit, document all related expenses and save all receipts.
Household Help and Child-Care Credits
There's a complicated set of IRS rules for housekeepers and nannies. You can claim the credit for domestic help as long as it involves caring for a qualifying child who, of course, is also your dependent. The work-related expense test still holds; if you're retired, household expenses won't meet the guidelines. If only part of the expense involves caring for the child so you can work, only that part qualifies for the child-care credit. The expense of a nanny who only shows up on a weekend so you can take a leisurely day trip would not qualify.
Figuring Out the Child-Care Credit
If you've met all the tests for the child-care and dependent tax credit, use Form 2441 to calculate the amount. IRS rules for 2018 allow up to $3,000 in expenses per child for up to two children. Figure the total credit as a percentage of this amount, depending on your income level. The credit is nonrefundable: If it exceeds your tax liability, the difference is not refunded to you. In addition, any reimbursement for care from a flexible spending account at work is deducted from the expense amount before you figure the credit.