Making Summer Less Taxing
A couple of my recent musings have been on the subject of summer earnings, handling money and the effect Uncle Sam's money grabbing representative, aka the tax man, can have. But not all is dire!
Summer is a time when some parents are staring at rather large outlays of cash, some laying out a good chunk of change on day camps or other care for their kids, while others may be trying to plan (and pay) for their children heading to college at summer's end.
And believe it or not, with the average cost of summer camp being about $300 per week and the average annual public university tuition cost being just over $9,100 (private colleges are roughly three and a half times that), the tax code contains some nice benefits to help pay for camp and college.
We'll address a tax-advantaged way to help pay for summer child care costs this week, and then deal with a tool for helping to pay for college in the next "Profit From It" in two weeks.
The IRS noted in their Special Edition Tax Tip 2015-12, that it's becoming more common for parents to pay for camp for their children while they work or look for work. If this is the case, the costs very well might qualify for the Child and Dependent Care Credit.
For expenses to qualify for the credit, certain criteria and conditions must be present:
- Care must be for qualifying persons. The expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify.
- Care must be for work-related expenses. This means that the taxpayer must pay for care so he or she can work or look for work. The "look for work" criteria is often overlooked. This rule also applies to the taxpayer's spouse if a joint return is filed. The spouse can meet this rule during any month he or she is a full-time student, something that is also often overlooked. The spouse also meets it if he or she is physically or mentally incapable of self-care.
- Earned income is required. Earned income includes wages, salaries, and tips, as well as, net earnings from self-employment. Like the rule in #2 above, if a joint return is filed, a taxpayer's spouse must also have earned income, and also like the above, the spouse is treated as having earned income for any month that he or she is a full-time student or incapable of self-care.
- A joint return is required, if married. A parent can still take the credit, however, if the couple is legally separated or living apart.
- Location of care. Expenses may qualify for the credit whether the care takes place at home, at a daycare facility, or at a day camp.
- Amount of Credit. The credit allowed will range from 20 percent to 35 percent of allowable expenses, depending on the amount of the taxpayers' income for the year.
- Limits on expense amounts. The credit calculation is limited to expenses of $3,000 for one qualifying person or $6,000 for two or more.
- BIG ONE - certain types of care do not qualify. You cannot take the credit on amounts paid for: -Overnight camps or summer school tutoring costs. -Care provided by a spouse or a sibling who is under age 19 at the end of the year. -Care given by a person who the taxpayer can claim as a dependent.
To claim the credit, you will have to file Form 2441, Child and Dependent Care Expenses, when you file your tax return. To complete this form, the name, address, and taxpayer identification number of the care provider is required, so be sure you get that information now.
Also, be sure you keep all receipts and records for substantiating your expenses so you will have it at tax time or in case of an audit.
Don't forget that special rules apply if you (or your spouse, if married) get dependent care benefits from an employer, and that this credit applies not just for summer but for all year round.
You can also get more information on this topic from IRS Publication 503, Child and Dependent Care Expenses.
As said earlier, check back in two weeks as we discuss an important financial tool to help pay for college, so you can continue to "Profit From It"!
