Childcare Tax Credit

• The costs of childcare can be steep. However, monies paid to another person or business to care for your child may result in a tax credit. Childcare tax credits are offered for children under the age of 12 who lived with you more than half the year. Credits are only applied if childcare was provided so that you could work, or look for work. To claim this deduction, you must keep all receipts for payments made to a childcare provider. Childcare credits can be up to 35 percent of your childcare expenses depending on your adjusted gross income.
  
  

Nannies

• Unfortunately, paying someone to come to your home to pay for your child can result in additional tax liability rather than a credit. Employing a nanny makes you a household employer and are required to obtain an Employer Identification Number from the Internal Revenue Service. Household employers are required to pay and withhold Medicare and Social Security tax for each employee. In addition, you could be required to pay federal unemployment tax. Employees must be legally able to work in the United States.
  
  

Dependent Child Tax Credit

• A tax credit is available for each qualifying child in your home. As long as your baby is your biological or adopted child, lives with you more than half the year and will receive more than half her financial support from you, you can claim the child on your taxes. Apply for a Social Security number as soon as your baby is born to ensure you receive a Social Security card in time to file your taxes. Tax credit amounts vary by year. If your baby was born in 2010, you can receive up to $1,000 in credits.
  
  

Excessive Medical Expeditures

• You may be able to deduct out of pocket medical costs for you or your baby on your tax return. Medical expenses that exceed 7.5 percent of your adjusted gross income are tax deductible. This can include an extended stay in the hospital after your baby is born that is not covered by your insurance or cost of prescription if your baby falls ill. Use Form 1040, Schedule A to claim excessive medical expenditures.
  
  

Considerations

• Keeping good records is essential when claiming tax credits. Receipts, invoices from employees, and medical bills help you remain in compliance with the IRS. Your responsibility to prove any tax deductions or credits you claim is called your burden of proof. When you are audited, an IRS agent will request back up documentation to support information in your tax returns. Consider setting up a payroll system if you choose to use a nanny to avoid missing any tax payments.