Most working parents are well aware they get a tax break to help cover the costs of sending their child to day care. But some parents overlook the tax advantage of summer day camp costs.
During school vacations, many parents turn to these supervised programs to provide child care while they work. Overnight camps do not count, but the Internal Revenue Service says day camp expenses do qualify for this popular credit.
Regardless of whether you paid for after-class child care during the school year or a week of day camp during summer break, you can apply the costs to the Child and Dependent Care Tax Credit and use it to reduce your tax bill at filing time.
And while this credit also applies to care for dependents other than children, there are limits — on what you spend as well as how much you earn — that reduce the actual amount of the credit. Plus, you must make sure you and the person being cared for meet IRS eligibility guidelines.
In addition to summer day camp, here are some care services that are eligible for the credit:
You may be able to claim the Child and Dependent Care Credit if you paid expenses for the care of a qualifying individual to enable you and your spouse filing a joint return to work or actively look for work. You may not take this credit if your filing status is married filing separately. The credit amount is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income.
The total expenses that you may use to calculate the credit should not be more than $3,000 (one qualifying individual) or $6,000 (two or more qualifying individuals). Expenses paid for the care of a qualifying individual are eligible expenses if the primary reason is to assure the individual’s well-being and protection.
A qualifying individual for the Child and Dependent Care Credit is:
- Care services eligible for credit.
- Private home nurses.
- Licensed dependent-care centers.
- Nursery school and kindergarten costs. In these cases, if the costs of school are separate from child care expenses, only the child care portion qualifies.
- Household help as long as the services are necessary for the well-being and protection of the qualifying individual.
Actual care cost limits
The first thing to keep in mind is that the credit probably will not pay for all of your child care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.
You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then, this amount is further reduced based on your overall income.
There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.
Percentage restrictions
The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.
So regardless of how much you pay, the potential maximum child and dependent care credit is $1,050 (35 percent of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35 percent to 20 percent of your allowable care costs.
The 35 percent rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20 percent for those earning more than $43,000.
And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable. For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you will not get the extra $300 as a refund.
Defining dependents
If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.
The child must be younger than 13. He or she also must meet the requirements set out in the IRS’ dependent requirements. This means, the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so you need to be familiar with the tax filing instructions or consult your tax adviser if this is your situation.
Ten Things to Know About the Child and Dependent Care Credit from the IRS:
If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit on your Federal income tax return.
- The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.
- The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.
- You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.
- The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.
- Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.
- The qualifying person must have lived with you for more than half of a given tax year. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.
- The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.
- You may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
- The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.
- If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer; thus, you may have to withhold and pay social security and Medicare tax and pay Federal unemployment tax.
If you have any questions, please feel free to contact JV LAW GROUP. Call us today at (714) 752-3270.
