School's Out - Who Is Going to Take Care of the Kids?
Article Highlights:
Child Age Limits
Employment-Related Expense
Married Taxpayer Earnings Limits
Qualifying Individuals
Disabled or Full-Time-Student Spouse
Expense Limits
Applicable Percentage Table
The Credit
Day Camps
Overnight Camp or Tutoring
School Expenses
Day Care Facility
Dependent Care Benefits
In-Home Care
Substantiation
State Tax Credit
Summer has just arrived, and there is a tax break that working parents should know about. Many working parents must arrange for care of their children under 13 years of age (or any age if disabled) during the school vacation period. A popular solution — with a tax benefit — is a day camp program. The cost of day camp can count as an expense toward the child and dependent care credit. But be careful; expenses for overnight camps do not qualify. Also not eligible are expenses paid for summer school and tutoring programs.
If the qualifying child turned 13 during the year, the care expenses paid for the child for the part of the year he or she was under age 13 will qualify.
For an expense to qualify for the credit, it must be an “employment-related” expense; i.e., it must enable you and your spouse, if married, to work, and it must be for the care of your child, stepchild, foster child, brother, sister or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.
The qualifying expenses are limited to the income you or your spouse, if married, earn from work, using the figure for whoever earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled.
The qualifying expenses can’t exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying persons. This limit does not need to be divided equally. For example, if you paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses; in most cases, 20%. If your joint adjusted gross income (AGI) is $43,000 or less, the percentage will be higher, but it will not exceed 35%. The table illustrates credit percentages at various levels of AGI.
AGI | But Not | Applicable | AGI | But Not | Applicable |
0 | 15,000 | 35 | 29,000 | 31,000 | 27 |
15,000 | 17,000 | 34 | 31,000 | 33,000 | 26 |
17,000 | 19,000 | 33 | 33,000 | 35,000 | 25 |
19,000 | 21,000 | 32 | 35,000 | 37,000 | 24 |
21,000 | 23,000 | 31 | 37,000 | 39,000 | 23 |
23,000 | 25,000 | 30 | 39,000 | 41,000 | 22 |
25,000 | 27,000 | 29 | 41,000 | 43,000 | 21 |
27,000 | 29,000 | 28 | 43,000 | No Limit | 20 |
Example: Al and Janice both work, each with earned income in excess of $40,000 per year, thus their AGI would be in excess of $43,000 and the applicable credit expense rate will be 20%. Janice has a part-time job, and her work hours coincide with the school hours of their 11-year-old daughter, Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their childcare credit would be $600 (20% of $3,000).
Please note that the rules for an enhanced child and dependent care credit that applied during the Covid-19 pandemic have expired, and for 2022 and later years the former rules have been reinstated and are what are discussed in this article.
A tax credit reduces a taxpayer’s tax bill dollar for dollar. Thus, in the above example, Al and Janice pay $600 less in taxes by virtue of the credit. However, the credit can only offset income tax and alternative minimum tax liability, and any excess is not refundable. The child and dependent care credit cannot be used to reduce self-employment tax, or the taxes imposed by the Affordable Care Act.
Situations related to childcare include:
Day Camps – The costs of day camp generally count as expenses toward the child and dependent care credit. A day camp or similar program may qualify even if the camp specializes in a particular activity, such as soccer or computers. The rule that a dependent care center must comply with applicable state and local laws also applies to a day camp where more than six persons are cared for in return for a fee.
Overnight Camp or Tutoring – No portion of the cost of an overnight camp or a tutoring program is a qualified expense.
School Expenses – Only school expenses for a child below the level of kindergarten will qualify for the credit. But expenses paid for before- and after-school care of a child in kindergarten, or a higher grade are eligible.
Day Care Facility – The expenses paid to the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws.
Dependent Care Benefits – Some employers have dependent care assistance programs for the benefit of their employees. Payments received under these plans and used by an employee to pay dependent care expenses are excludable from employees’ incomes. The maximum amount of tax-free dependent care benefit is currently limited to $5,000 of qualifying expenses. Any amount reimbursed under a dependent care assistance program must be subtracted from the $6,000 of qualified expenses allowed to determine the credit. CAUTION: If you have only one child and receive more than $3,000 in dependent care benefits, the excess over $3,000 will be taxable to you.
In-Home Care – If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns.
To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information, except the tax ID number is not needed if the provider is a tax-exempt organization such as a church or school. You may run across care providers who are reluctant to provide their ID numbers because they don’t plan on reporting their income and paying their taxes. Just remember, without the ID number, you cannot claim the credit. Be sure to obtain the required information before you pay the provider.
Some states also allow a similar credit on the state income tax return. If your state is one of those, additional information, such as the care provider’s phone number, may be required.
If you have questions about how the childcare credit applies to your particular tax situation, please give this office a call.
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