For some parents, sending their kids to day camp is a way to get a bit of peace and quiet. For others, it is an opportunity to work or look for employment without having to scramble for childcare. If you are in the latter category, do not let your hectic life cause you to forget to take tax advantage of your childcare situation.
Your summer day camp and other childcare expenses, along with similar expenses the rest of the year, may earn you a valuable tax credit. Tax credits are especially valuable because they are directly subtracted from your tax bill. (Deductions only lower your tax bill in proportion to your tax rate.)
You can claim the Child and Dependent Care Credit for 20%-35% of your allowable childcare expenses, depending on your adjusted gross income (AGI), up to $3,000 of expenses per year for one qualifying child/dependent or up to $6,000 for two or more. You can only take the credit for the expenses incurred during the amount of time under care — for a summer day camp, that is the days when camp is in session.
The Tax Cuts and Jobs Act (TCJA) kept the Child and Dependent Care Credit in place, despite early talks of doing away with it. “The Dependent Care Credit can be very valuable. It was actually on the potential chopping block as far as the recent tax reform, but it survived,” reports Betterment Head of Tax Eric Bronnenkant. “Let’s say you have two kids, and let’s say your employer offers a dependent care account, you’re able to contribute up to $5,000 tax-free through your employer and get reimbursed for dependent care expenses tax-free. And then on top of that, you also get another $200 credit effectively for another $1,000 worth of expenses.”
The person being cared for must meet the criteria of a “qualifying individual” in order for the credit to apply. Examples include a dependent child under the age of thirteen at the time care is provided, a spouse who cannot take care of themselves, or other individuals who cannot take care of themselves and qualify as your dependent (with certain limitations).
To be eligible for the credit, the childcare expenses must be work-related, allowing you or your spouse to either work or seek work. Married couples need to file a joint return to receive the credit, although you are still able to take the credit if you are living apart or legally separated. You cannot claim the credit if your filing status is married filing separately.
You also must have earned income to qualify. Wages, salaries, and tips qualify as earned income, as do net earnings from any self-employment. When filing jointly, your spouse must also have earned income for you to qualify.
Most types of child and dependent care that you pay for are covered, including day camps, traditional daycare facilities, or at-home care. Tutoring costs for summer school or overnight camps are not eligible. The care is not eligible if provided by your spouse, any of your children that are under the age of nineteen at the end of the calendar year, or by anyone that you can claim as a dependent. Make sure that you get the name, address, and Taxpayer Identification Number (TIN) of the caregiver; you will need to supply that information to the IRS.
If your employer supplies dependent care benefits, special rules come into play. For details on these rules and other information related to this credit, check IRS Publication 503, “Child and Dependent Care Expenses” and Tax Topic 602.
To claim your credit, complete Form 2441, “Child and Dependent Care Expenses” and submit it with Form 1040.
Working parents often have a hard-enough time getting by on their salaries. If you are one of those harried working parents, do not pass up a potentially valuable tax credit. Take some time to log your expenses, save the relevant receipts, and you may enjoy some extra cash — the second-best thing for an exhausted working parent. The first? A long nap.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.