As school lets out for the summer, parents are facing their yearly decision of what to do with children ages 13 and younger, while they are at work. With a little planning, your children can get the most from their vacation, and you may be eligible for a tax break! Think summer day camps. For interests as varied as nature and hiking; guitars and music, and computers and programming, day camps offer children fun, learning and friends that can last a lifetime. The best part for parents is that day camps qualify for a favorable tax benefit.
To be specific, there is not a special summer camp tax deduction. Summer day camps qualify as part of the year-round Child and Dependent Care Tax Credit. Regardless of whether you pay for child-care costs during the school year or summer break, you can apply the costs to the Child and Dependent Care Tax Credit. Note that this is a credit, not a deduction, so it lowers your tax bill dollar for dollar.
Like most tax breaks, this has limits on both what you spend and how much you earn, which reduce the actual amount of the credit you are entitled. The credit is calculated up to $3,000 of expenses for one child and up to $6,000 in expenses for two or more children. The credit rate ranges from 20% to 35% of expenses, depending on your income. The 35% rate applies if your income is under $15,000. If you earn more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20% for those earning more than $43,000.
For example, if you have one child, pay more than $3,000 for care, and you earn more than $43,000, you can claim a $600 credit. Families who earn more than $43,000 annually and have two children are eligible to receive a maximum credit of $1,200. The dependent-care credit is nonrefundable, which means it can take your tax bill to zero. However, with this scenario, you will not receive a refund.
Children must be age 13 or younger, must be related to you and live with you most of the time. Consult your Tax Adviser if you are divorced or separated, as there are exceptions if this is your situation. Parents must work or be looking for work. You must have earned income to qualify for this credit. If you are married, both you and your spouse must have a job or be a full-time student. Furthermore, if your child turns 14 during the summer, you may still claim the child care costs, up until the day he turns 14. So, if your son turns 14 on July 24th, you may use the cost of his summer day camp through July 24th to qualify for the credit.
Additionally, the IRS allows you to combine all your care costs for two or more children to reach the $6,000 limit. For example, Sandra has two children. Her eldest daughter, age 12, did not require after school care during the school year, but she enrolled her in a summer day camp for $1,500. Her 2-year-old daughter required full-time day care throughout the year at a cost of $4,700. Rather than claim the credit for only her 2-year-old ($3,000 of expenses), Sandra can combine the cost for both of her children totaling $6,200, thus, allowing her to claim $6,000 of expenses for two or more children.
Most day camps are eligible for the credit; however, overnight camps are ineligible. Tutoring and summer school are ineligible. Preschool, nursery school and kindergarten costs are eligible, if the costs of school are separate from child-care expenses. Only the child-care portion qualifies.
Credit for Teens
If you have a child older than 15, you may want to consider enrolling your teenager in driver’s education courses. The state of Georgia allows taxpayers to take up to a $150 Driver Education tax credit on your state income tax. This credit can be taken for the amount paid for a dependent minor child to successfully complete a driver’s education course at a private driver training school licensed by the Department of Public Safety.
This credit is offered only once per dependent minor child, regardless of how many times he or she has taken the course. The credit is also limited to the amount of the taxpayer’s income tax liability, which means it is not a refundable credit. For details regarding which schools are licensed by the Department of Public Safety, please visit the following website: http://www.dds.ga.gov/Training. Click on the “Approved Driver Education Schools” link.
Child and Dependent Care Tax Credit and Flexible Spending Accounts
If you are in the 25% tax bracket or higher and your employer offers a child care flexible spending account (FSA), you may be able to save more money by using the FSA rather than the tax credit—especially, if you only have one child. You are allowed to put up to $5,000 of pre-tax money into the FSA; thereby, saving $1,250 in taxes (25%). In contrast, if you have only one child, your maximum credit would only be $600.
With two or more children, if you paid a total of $10,000 for day care and summer day camps, $6,000 is the maximum allowable credit amount. However, if you used $5,000 from your FSA to pay part of those costs, the credit is cut to $1,000. Since the FSA is not taxable income, you cannot use that amount to help further cut your tax bill.
Finally, if you received any dependent-care benefits from your company during the year, your maximum eligible credit is reduced. For example, if your employer were to provide untaxed dependent care benefits directly to you, those amounts reduce the amount of expenses you can claim. If the company pays you $500 for child-care costs, you must reduce your credit amount by that amount. A $3,000 limit becomes $2,500.
At Henssler Financial we believe you should Live Ready. That means taking advantage of tax savings opportunities throughout the year. If you have questions on how to apply the Child and Dependent Care Tax Credit to your situation, give the experts at Henssler Financial a call at 770-429-9166, or e-mail us at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
