No more pencils, no more books, no more teacher’s dirty looks…school’s out for summer. If you’re old enough to remember the Alice Cooper song, you can blame me when you’re still humming it six hours from now!
Now that another school year is coming to a close, how are you going to keep the kiddies occupied and out of trouble for the next few months? Chances are, you and your spouse will both be working during the lazy hazy crazy days of summer, and you’ll have to pay for child care, so why not have Uncle Sam pay for part of the cost? The federal Child and Dependent Care Tax Credit is applicable for summertime child care too, so take advantage of it, but first you need to know how it works. Here are some important points:
1-you have to pay for care so you (and your spouse if filing jointly) can work or actively look for work. The spouse can meet this test for any month that he/she is a full-time student or physically or mentally incapable of self-care.
2-you must have earned income, and if you’re filing jointly, your spouse must have earned income too. Earned income is generally wage and self-employment income.
3-the care must be for one or more qualifying people. In the case of this article, since I’m writing about children, they must be under age 13 and be claimed as a dependent.
4-the care can be provided at home, at a daycare facility, or even at a day camp. If it’s inside your home, then you also have to think about the household employer requirements.
5-the credit is a percentage of the qualified expenses that you for the qualifying person. This percentage starts at 35% and drops to a minimum of 20%, depending on income.
6-up to $3,000 of expenses for one person or $6,000 for two or more qualifying people can be used to compute the credit.
7-the cost of overnight camps or summer school tutoring doesn’t qualify, nor does anything paid to a spouse or other dependent. If either spouse receives dependent care benefits from an employer, special rules apply.
8-the credit is claimed on Form 2441, and basic information on the provider will need to be entered on this form, so make sure you have the provider’s name, address, and identifying number (social security or employer i.d. number). Keep good records to substantiate the credit claimed.
I’ve had many clients over the years who had unrealistic expectations of how much money they were going to save by claiming this credit. Realistically, if you have two or more eligible kids, $6,000 is the maximum amount of child care expenses you can use to compute the credit, and if your income is over $43,000, the percentage for the credit will be 20%, so the maximum credit you can get is $1,200, which isn’t a lot. Obviously it’s better than nothing, and it’s a credit so it will reduce your tax dollar for dollar, as opposed to a deduction which will only reduce your tax by whatever marginal tax rate you’re at. But with good record keeping you’ll save a few bucks, and will be able to afford to give each of your kids (and your spouse) their very own copy of Alice Cooper’s “School’s Out”.
Please forward this article to all parents who incur child care expenses, and have a good summer.
No more pencils, no more books…