Best way for Grandparent paying for day care

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skp
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Best way for Grandparent paying for day care

Post by skp » Sat Feb 09, 2019 5:28 pm

My Dil is going back to work and I'm considering covering their day care expenses. My sister and I never had to pay for childcare due to family helping out. I would if I could but my son lives too far away for me to help. I want to pass the gift I received of no cost childcare so I was considering covering their child care expenses.
After some googling, I see that I can't get a tax deduction for this. So I was thinking I should just write them a check (should be under gift limit) for them to use for the childcare.
Any thoughts or other suggestions regarding this plan

hoops777
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Joined: Sun Apr 10, 2011 12:23 pm

Re: Best way for Grandparent paying for day care

Post by hoops777 » Sat Feb 09, 2019 5:33 pm

It is under the gift limit so why not?seems simple enough.
Last edited by hoops777 on Sat Feb 09, 2019 5:57 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.

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OAG
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Re: Best way for Grandparent paying for day care

Post by OAG » Sat Feb 09, 2019 5:37 pm

Great idea and great to have you for a grandparent. Yes get a good estimate of cost and just write a check you could give as much as $45K (DS, DDIL and DGrand Child) without any need to do anything tax wise for yourself or your family.
OAG=Old Army Guy. Retired CW4 USA (US Army) in 1979 21 years of service @ 38.

kaneohe
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Re: Best way for Grandparent paying for day care

Post by kaneohe » Sat Feb 09, 2019 6:19 pm

Do either of the parents have a Flexible Spending Account offered by their employers? They could basically get a tax deduction for some or all of the child care expenses and your gift would supplement this.

GuyInFL
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Re: Best way for Grandparent paying for day care

Post by GuyInFL » Sat Feb 09, 2019 6:33 pm

kaneohe wrote:
Sat Feb 09, 2019 6:19 pm
Do either of the parents have a Flexible Spending Account offered by their employers? They could basically get a tax deduction for some or all of the child care expenses and your gift would supplement this.
+1
Pay for childcare with pre-tax dollars and get the deduction! Can you do that?

kaneohe
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Re: Best way for Grandparent paying for day care

Post by kaneohe » Sat Feb 09, 2019 7:05 pm

GuyInFL wrote:
Sat Feb 09, 2019 6:33 pm
kaneohe wrote:
Sat Feb 09, 2019 6:19 pm
Do either of the parents have a Flexible Spending Account offered by their employers? They could basically get a tax deduction for some or all of the child care expenses and your gift would supplement this.
+1
Pay for childcare with pre-tax dollars and get the deduction! Can you do that?
No, you never get to double -dip. https://www.payflex.com/individuals/com ... ndent-care
The funds are set aside pre-tax and can be used for child care.........actually better than a deduction these days because it is guaranteed to reduce taxes. With the higher standard deduction this yr, many don't get to itemize.

mortfree
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Re: Best way for Grandparent paying for day care

Post by mortfree » Sat Feb 09, 2019 7:09 pm

kaneohe wrote:
Sat Feb 09, 2019 7:05 pm
GuyInFL wrote:
Sat Feb 09, 2019 6:33 pm
kaneohe wrote:
Sat Feb 09, 2019 6:19 pm
Do either of the parents have a Flexible Spending Account offered by their employers? They could basically get a tax deduction for some or all of the child care expenses and your gift would supplement this.
+1
Pay for childcare with pre-tax dollars and get the deduction! Can you do that?
No, you never get to double -dip. https://www.payflex.com/individuals/com ... ndent-care
The funds are set aside pre-tax and can be used for child care.........actually better than a deduction these days because it is guaranteed to reduce taxes. With the higher standard deduction this yr, many don't get to itemize.
Childcare expenses (post tax dollars) are not part of itemized deductions schedule A. You may qualify for the tax credit even if you take the standard deduction. I think it is on schedule 3 for the new system.

kaneohe
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Re: Best way for Grandparent paying for day care

Post by kaneohe » Sat Feb 09, 2019 8:04 pm

mortfree wrote:
Sat Feb 09, 2019 7:09 pm
kaneohe wrote:
Sat Feb 09, 2019 7:05 pm
GuyInFL wrote:
Sat Feb 09, 2019 6:33 pm
kaneohe wrote:
Sat Feb 09, 2019 6:19 pm
Do either of the parents have a Flexible Spending Account offered by their employers? They could basically get a tax deduction for some or all of the child care expenses and your gift would supplement this.
+1
Pay for childcare with pre-tax dollars and get the deduction! Can you do that?
No, you never get to double -dip. https://www.payflex.com/individuals/com ... ndent-care
The funds are set aside pre-tax and can be used for child care.........actually better than a deduction these days because it is guaranteed to reduce taxes. With the higher standard deduction this yr, many don't get to itemize.
Childcare expenses (post tax dollars) are not part of itemized deductions schedule A. You may qualify for the tax credit even if you take the standard deduction. I think it is on schedule 3 for the new system.
Thanks for the correction.......you are correct. The credit is calculated here https://www.irs.gov/pub/irs-pdf/f2441.pdf

Looks like the credit varies from 20-35% of the expenses depending on AGI......high AGI gets the smaller factor so the FSA may be better for higher incomes and the tax credit may be better for lower incomes. The FSA deduction is also limited in amount so maybe both the credit and the FSA will be useful.

miamivice
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Re: Best way for Grandparent paying for day care

Post by miamivice » Sat Feb 09, 2019 8:12 pm

It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.

Gill
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Location: Florida

Re: Best way for Grandparent paying for day care

Post by Gill » Sat Feb 09, 2019 8:19 pm

miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

miamivice
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Re: Best way for Grandparent paying for day care

Post by miamivice » Sat Feb 09, 2019 8:22 pm

Gill wrote:
Sat Feb 09, 2019 8:19 pm
miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
It's clearly a step transaction the way it was presented in the first post. The grandparent wants to pay for childcare. He sees that he does not qualify for tax credits, so he gives the money to his child who pays for childcare and collects tax credits, even though the child didn't personally pay for childcare (it was paid for by the grandparent.)

I am quite sure that it would never get noticed, but discussions about methods to avoid paying taxes legally owed are against forum rules.

Gill
Posts: 5763
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Best way for Grandparent paying for day care

Post by Gill » Sat Feb 09, 2019 8:38 pm

miamivice wrote:
Sat Feb 09, 2019 8:22 pm
Gill wrote:
Sat Feb 09, 2019 8:19 pm
miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
It's clearly a step transaction the way it was presented in the first post. The grandparent wants to pay for childcare. He sees that he does not qualify for tax credits, so he gives the money to his child who pays for childcare and collects tax credits, even though the child didn't personally pay for childcare (it was paid for by the grandparent.)

I am quite sure that it would never get noticed, but discussions about methods to avoid paying taxes legally owed are against forum rules.
I agree with you entirely and i’m well aware of the forum rules pertaining to tax evasion. Nevertheless, a gift to your child who then spends money on child care hardly seems like a step transaction.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

miamivice
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Joined: Tue Jun 11, 2013 11:46 am

Re: Best way for Grandparent paying for day care

Post by miamivice » Sat Feb 09, 2019 8:41 pm

Gill wrote:
Sat Feb 09, 2019 8:38 pm
miamivice wrote:
Sat Feb 09, 2019 8:22 pm
Gill wrote:
Sat Feb 09, 2019 8:19 pm
miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
It's clearly a step transaction the way it was presented in the first post. The grandparent wants to pay for childcare. He sees that he does not qualify for tax credits, so he gives the money to his child who pays for childcare and collects tax credits, even though the child didn't personally pay for childcare (it was paid for by the grandparent.)

I am quite sure that it would never get noticed, but discussions about methods to avoid paying taxes legally owed are against forum rules.
I agree with you entirely and i’m well aware of the forum rules pertaining to tax evasion. Nevertheless, a gift to your child who then spends money on child care hardly seems like a step transaction.
Gill
It wouldn't be a step transaction except the reason for giving it to the child and not the provider is because the child qualifies for a tax deduction while the grandparent does not.

Otherwise the best way to pay for childcare is just to pay the provider directly. No need to give it to the child.

If the parent wanted to give the money to the child regardless, the correct way of doing the taxes would be not to claim a tax deduction for childcare, since the child did not personally pay for the childcare himself/herself.

stan1
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Re: Best way for Grandparent paying for day care

Post by stan1 » Sat Feb 09, 2019 8:55 pm

miamivice wrote:
Sat Feb 09, 2019 8:22 pm
Gill wrote:
Sat Feb 09, 2019 8:19 pm
miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
It's clearly a step transaction the way it was presented in the first post. The grandparent wants to pay for childcare. He sees that he does not qualify for tax credits, so he gives the money to his child who pays for childcare and collects tax credits, even though the child didn't personally pay for childcare (it was paid for by the grandparent.)

I am quite sure that it would never get noticed, but discussions about methods to avoid paying taxes legally owed are against forum rules.
OP gifts money to son and DIL without any strings as a holiday gift, birthday gift, or just because. The IRS does not require a reason for a gift be established. Son and DIL welcome the gift and do whatever they want with it. They might put it in a Roth IRA, buy a Mercedes, buy diapers, or cut a check to daycare. The IRS does not require this type of accountability from individual taxpayers.

If someone thinks this is tax evasion I'd recommend you hire a tax attorney on your dime to seek clarification.
Last edited by stan1 on Sat Feb 09, 2019 8:57 pm, edited 1 time in total.

miamivice
Posts: 2196
Joined: Tue Jun 11, 2013 11:46 am

Re: Best way for Grandparent paying for day care

Post by miamivice » Sat Feb 09, 2019 8:56 pm

stan1 wrote:
Sat Feb 09, 2019 8:55 pm
miamivice wrote:
Sat Feb 09, 2019 8:22 pm
Gill wrote:
Sat Feb 09, 2019 8:19 pm
miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
It's clearly a step transaction the way it was presented in the first post. The grandparent wants to pay for childcare. He sees that he does not qualify for tax credits, so he gives the money to his child who pays for childcare and collects tax credits, even though the child didn't personally pay for childcare (it was paid for by the grandparent.)

I am quite sure that it would never get noticed, but discussions about methods to avoid paying taxes legally owed are against forum rules.
OP gifts money to son and DIL without any strings as a holiday gift, birthday gift, or just because. The IRS does not require a reason for a gift be established. Son and DIL welcome the gift and do whatever they want with it. They might put it in a Roth IRA, buy a Mercedes, buy diapers, or cut a check to daycare. The IRS does not require this type of accountability from individual taxpayers.
While the situation you presented could happen, it's not the situation that the OP presented in the first post.

Gill
Posts: 5763
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Best way for Grandparent paying for day care

Post by Gill » Sat Feb 09, 2019 8:59 pm

stan1 wrote:
Sat Feb 09, 2019 8:55 pm
miamivice wrote:
Sat Feb 09, 2019 8:22 pm
Gill wrote:
Sat Feb 09, 2019 8:19 pm
miamivice wrote:
Sat Feb 09, 2019 8:12 pm
It hasn't been mentioned, but what the grandparent is trying to do violates the step transaction doctrine.

In other words, the grandparent giving money to the child who then pays the childcare provider is a step transaction. The tax treatment must treat all of the steps as a single event, i.e, the grandparent pays the childcare provider. Since grandparents paying childcare providers do not qualify for tax deduction, splitting out the event into a series of steps cannot result in a tax credit.
I often argue on this forum that various transactions are step transactions but it’s probably a bit of a stretch here. Be prepared to take a lot of abuse for your opinion.
Gill
It's clearly a step transaction the way it was presented in the first post. The grandparent wants to pay for childcare. He sees that he does not qualify for tax credits, so he gives the money to his child who pays for childcare and collects tax credits, even though the child didn't personally pay for childcare (it was paid for by the grandparent.)

I am quite sure that it would never get noticed, but discussions about methods to avoid paying taxes legally owed are against forum rules.
OP gifts money to son and DIL without any strings as a holiday gift, birthday gift, or just because. The IRS does not require a reason for a gift be established. Son and DIL welcome the gift and do whatever they want with it. They might put it in a Roth IRA, buy a Mercedes, buy diapers, or cut a check to daycare. The IRS does not require this type of accountability from individual taxpayers.

If someone thinks this is tax evasion I'd recommend you hire a tax attorney on your dime to seek clarification.
Wink, wink😀. I am one.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

kaneohe
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Re: Best way for Grandparent paying for day care

Post by kaneohe » Sat Feb 09, 2019 9:42 pm

Is motive a factor in this step transaction? OP didn't mention anything about tax credits. I mentioned FSA and then child care credits came up later.

miamivice
Posts: 2196
Joined: Tue Jun 11, 2013 11:46 am

Re: Best way for Grandparent paying for day care

Post by miamivice » Sat Feb 09, 2019 10:26 pm

kaneohe wrote:
Sat Feb 09, 2019 9:42 pm
Is motive a factor in this step transaction? OP didn't mention anything about tax credits. I mentioned FSA and then child care credits came up later.
from the first post:
"After some googling, I see that I can't get a tax deduction for this. So I was thinking I should just write them a check (should be under gift limit) for them to use for the childcare."
If tax credits aren't the issue, the best way to pay for childcare is just to have the provider bill the grandparent.

RudyS
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Joined: Tue Oct 27, 2015 10:11 am

Re: Best way for Grandparent paying for day care

Post by RudyS » Sat Feb 09, 2019 10:29 pm

This is an example of (1) "TMI" - too much information, and (2) "if you don't want to hear the answer, don't ask the question."

Seriously, though, just give the kids a gift. If they want to spend it on child care, fine. If they want to take everyone on a vacation, fine.

hoops777
Posts: 2712
Joined: Sun Apr 10, 2011 12:23 pm

Re: Best way for Grandparent paying for day care

Post by hoops777 » Sun Feb 10, 2019 11:57 am

skp wrote:
Sat Feb 09, 2019 5:28 pm
My Dil is going back to work and I'm considering covering their day care expenses. My sister and I never had to pay for childcare due to family helping out. I would if I could but my son lives too far away for me to help. I want to pass the gift I received of no cost childcare so I was considering covering their child care expenses.
After some googling, I see that I can't get a tax deduction for this. So I was thinking I should just write them a check (should be under gift limit) for them to use for the childcare.
Any thoughts or other suggestions regarding this plan
Where does the op say anything about his son/grandson trying to get a tax credit?He clearly states he himself cannot and does not mention anything about taxes beyond that.He is giving them a gift of money and they will use it to pay for childcare.End of story.Nice Grandpa.
K.I.S.S........so easy to say so difficult to do.

Topic Author
skp
Posts: 56
Joined: Tue May 01, 2018 8:12 am

Re: Best way for Grandparent paying for day care

Post by skp » Sun Feb 10, 2019 5:05 pm

Thank you everyone. I don't want to do anything illegal. Nurse here not accountant. I had to google step transaction. Just out of curiosity/ playing devils advocate. Per Wikipedia there are a few tests the IRS uses to decide if it is a step transaction. One of them is a binding commitment. Would giving my son money for daycare fail the binding commitment test because I have no control over what he actually spends the money on?

Saving$
Posts: 1786
Joined: Sat Nov 05, 2011 8:33 pm

Re: Best way for Grandparent paying for day care

Post by Saving$ » Mon Feb 11, 2019 1:18 am

Why would this not fall into the same category as tuition payments?

Per the IRS, a parent can claim the American Opportunities Tax Credit even for college tuition paid directly by a grandparent.
(see page 2, gray example box, at: https://apps.irs.gov/app/vita/content/g ... redits.pdf)

Would this same logic apply to the childcare credit?

Leemiller
Posts: 1252
Joined: Sat Jun 01, 2013 12:42 pm

Re: Best way for Grandparent paying for day care

Post by Leemiller » Mon Feb 11, 2019 8:35 am

Op please ignore the step transaction post, sometimes advice on the internet is worth what you pay for it. Just keep your gifts under gift tax limits unless you take the additional steps required for a lifetime exclusion. I don’t work in the tax area, but I do exercise common sense.

What a wonderful gift you are giving. One thing to consider is having a conversation about this now, since it could make the difference between affording a private nanny vs daycare. We’ve used private nannies for both our children until they were older and thought the premium for individual care and the added convenience were worth it.

Leemiller
Posts: 1252
Joined: Sat Jun 01, 2013 12:42 pm

Re: Best way for Grandparent paying for day care

Post by Leemiller » Mon Feb 11, 2019 8:37 am

skp wrote:
Sun Feb 10, 2019 5:05 pm
Thank you everyone. I don't want to do anything illegal. Nurse here not accountant. I had to google step transaction. Just out of curiosity/ playing devils advocate. Per Wikipedia there are a few tests the IRS uses to decide if it is a step transaction. One of them is a binding commitment. Would giving my son money for daycare fail the binding commitment test because I have no control over what he actually spends the money on?
Yes of course this is not a binding commitment, nor is it the type of transaction meant to be covered by step transaction limits. It is too bad you are spending any time worried about this.

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