INA Weekly Brief

What Ivanka Trump’s Proposed Changes to the Child Care Tax Credit Can Mean to the Nanny World

March 20, 2017
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When President Trump laid out his vision for America to Congress last week he highlighted his vision to make tax policy around child care more family friendly. Ivanka outlined a plan to allow families to deduct child-care expenses from their taxable income, with the amount capped at the average cost of child care in their state.

According to recent statistics from Child Care Aware analyzed by Credito, in New York State a family with an infant and preschool aged child pays an average of $25,844 for child care in a year.

Let’s look at these numbers:

Under current tax law, this NY family with two children would likely receive a tax credit of $600 on their tax return for these costs, assuming family income greater than $43,000 per year. Under Ivanka’s proposal, this same family would likely receive a tax credit of $5,169 per year.

What is a tax credit v. deduction?

According to the Internal Revenue Service, tax credits provide a dollar-for-dollar reduction of your income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes. On the other hand, tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket.

Assuming a family’s adjusted gross income of $250,000 and a marginal federal tax rate of 33% and this $5,169 tax credit is the equivalent of a $15,633 tax-free deduction from taxable income.

So what does this mean for the nanny world?

Let’s assume the average nanny salary of $16 per hour, as reported in Brooklyn. At 40 hours a week and no overtime, this is an expense of $33,000 per year. Bump that to 50 hours per week, and the costs rise to $44,000 per year. At the low end, family payroll taxes and workers’ compensation insurance expense is $3,400 and at the high end $5,400.

In the nanny world, where 9 out of 10 nannies works off the books, the family would have a huge incentive to put the nanny on the books to take advantage of this higher tax credit. It would cost the family $3,400 – $5,400 a year in payroll taxes and insurance, and receive the equivalent of an almost $16,000 tax deduction.

For the nanny this means:

  • Access to unemployment benefits when the job ends
  • Coverage under workers’ compensation insurance for on the job injuries
  • Verifiable income for transactions such as home mortgages, car loans, and even cell phone plans
  • Payroll credits for eventual Social Security benefits
  • Access to her own tax credits for health insurance

Conclusion

This proposal benefits working families at all income levels, and particularly makes payroll tax compliance for the nanny a win-win proposition for the nanny and the family.

Kathy Webb is the founder of HomeWork Solutions. HomeWork Solutions offers both household payroll and household payroll tax compliance services to US families on a nationwide basis and has partnered with INA nanny agencies since 1993. Visit www.homeworksolutions.com 
* The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the International Nanny Association. The contents of this blog post are intended to convey general information only and not to provide legal advice or opinions. The contents of this post should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. The information presented in this post may not reflect the most current legal developments. No action should be taken in reliance on the information contained in this post and HWS and the INA disclaim all liability in respect to actions taken or not taken based on any or all of the contents of this post to the fullest extent permitted by law. Both HomeWork Solutions and the International Nanny Association recommend that an attorney should be contacted for advice on specific legal issues.