Summertime Child Care

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…

Education and Taxes

What’s the first word that comes to mind when you think about education…taxes, right? Well, even if it’s not the first thing that you think about, the expenses of higher education for a taxpayer or dependent can save money on taxes, via a deduction or a credit. A deduction will save you taxes based on your top marginal tax rate, so for example, if you’re in the 25% tax bracket, a dollar spent on qualifying education costs will save you twenty five cents in tax. A credit is much more powerful, since it directly reduces your tax, so if you have a tax credit of a dollar, it will save you a dollar in tax. This discussion will tell you about a few ways that Uncle Sam can help you pay for higher education costs.

American Opportunity Credit-this credit can be claimed for four years of post-secondary education per student, with a maximum annual credit of $2,500 per student. The full credit is available to single taxpayers with modified adjusted gross income (MAGI) of $80,000 or less, and married couples filing jointly, with MAGI of $160,000 or less. The credit phases out for MAGIs above those thresholds.

Lifetime Learning Credit-this credit can be claimed for all students enrolled in eligible educational institutions, and is up to $2,000, period, regardless of how many students are claimed on a tax return. Unlike the American Opportunity Credit, there’s no limit on the number of years a student may claim this credit, though only one credit or the other may be claimed in one year, not both. This credit is handy for graduate students (who have already received the maximum of four years of American Opportunity Credit), students who are taking only one course, or people who aren’t pursuing a degree.

Tuition and Fees Deduction-as I mentioned above, credits are more valuable than deductions, but if taking this deduction nets more tax savings than, say, the Lifetime Learning Credit, then you claim the one that saves the most. Similar to the Lifetime Learning Credit, the maximum deduction is $4,000, regardless of how many students are claimed. This deduction phases out with the same thresholds as the American Opportunity Credit.

Student Loan Interest-generally, personal interest paid (other than home mortgage interest) is not deductible. If MAGI is under $75,000 single/$150,000 married filing jointly, interest on student loans to pay for higher education is deductible, up to $2,500 per year.

There are other ways that education expenses can save you tax dollars, and, as with anything having to do with IRS and tax laws, there are numerous requirements, thresholds, and fine print, so make sure you speak to your favorite CPA (hint hint) if you have any questions. Have you saved taxes with higher education expenses? Please leave a comment about how you did it. As always, forward this article to somebody you know who could benefit from it, and let me know other topics you’d like to see me write about.

%d bloggers like this: