Are Grandparents’ Child Care Expenses Tax Deductible?

Child care expenses are not deductible, but the Internal Revenue Service rules offer a tax credit for these expenses. These credits are more valuable than deductions as they reduce tax liability dollar for dollar. Grandparents can claim the tax credit for eligible child care expenses in 2021, which is more generous and potentially refundable due to the American Rescue Plan Act.

Qualified care expenses for a child under 13, a spouse or parent unable to care for themselves, and a child under 17 are exempt from the “Nanny tax”. Grandparents (parents of the taxpayer) are exempt from the “Nanny tax” and will not have to pay social security and Medicare tax.

Grandparents can deduct child care, but there are numerous hurdles to overcome. They must have earned income and claim the grandchild as a dependent. The child and dependent care credit for 2021 is fully refundable and worth up to $8,000 for two or more children.

Grandparents providing childcare for grandchildren in either the grandparents’ home or the child’s home are exempt from any payroll taxes. They can report the income on Schedule C since the care is provided in their home. Medical and dental expenses paid on behalf of a grandchild during the year may be deductible for a grandparent who itemizes deductions.

Commuting from the home to the location where the childcare provider provides childcare and back is generally not deductible. A grandparent raising a grandchild may qualify for a $2,000 child tax credit, and under certain specific circumstances, up to $1,400 of the credit can be claimed.