School’s Out for the Summer! Now Who’s Going to Watch the Kids?
Summer is here, and that means the kids are home from school – but for many working parents, it also means they need to find a daily childcare solution during the workweek. The good news is, there is a helpful tax break that provides relief when it comes to summer childcare.
Tax Credits for Childcare Expenses
Day camp programs are a popular solution for children 13 years of age and younger – and the good news is, many of these day camps and/or care centers come with a tax benefit. The cost of your child’s day camp can count as a dependent care credit and a necessary expense towards the child; but be careful: expenses for overnight camps do not qualify. Expenses paid for summer school and tutoring programs are also not eligible.
Here are the exact care services that are 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.
How it Works
For an expense to qualify for the credit, it must be an “employment-related” expense; i.e., it must enable you and your spouse, if married, to work, and it must be for the care of your child or any other ‘dependent’ who is under 13, lives in your home for more than half the year, and does not provide more than half of his or her own financial support for the year. Both parents must also be employed. There are exceptions in the cases of divorced or separated parents, so be sure to read the tax-filing instructions carefully or consult your tax adviser if this is your situation.
The child- and dependent care credit can also be claimed when you pay for the care of other dependents, as they are deemed qualified by the IRS. For example, if you pay someone to look after your spouse or a dependent of any age who is incapacitated because of physical or mental limitations, you might be eligible for this tax break.
Care Cost Limits
The qualifying expenses are limited to the income you or your spouse, if married, earn from work, using the figure for whoever earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled.
The qualifying expenses can’t exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying children. This limit does not need to be divided equally. For example, if you paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses; in most cases, 20%.
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. Additionally, if the qualifying child turned 13 during the year, the care expenses paid for the child for the part of the year he or she was under age 13 will qualify.
More information on the child- and dependent care credit can be found in IRS Publication 503, Child and Dependent Care Expenses, or IRS Publication 17, Your Federal Income Tax. If you have any questions or think you may be eligible for this tax credit, contact Your Favorite CPA online or give us a call at (619) 800-6852.