TAX TIP No. 61
Most working parents are well aware they get a tax break to help cover the costs of sending Jimmy or Janie to day care. But some parents overlook the tax advantage of summer day camp costs.
In this tax tip:
- Actual care cost limits
- Percentage restrictions
- Defining dependents
- Only working taxpayers need apply
- Identify your caregivers
- Company benefit considerations
Regardless of whether you paid for after-class child care during the school year or a week of day camp during summer break, you can apply the costs to the Child and Dependent Care tax credit and use it cut your tax bill at filing time.
And while this credit also applies to care for dependents other than children, there are limits -- both on what you spend and how much you earn -- that reduce the actual amount of the credit. Plus, you must make sure you and the person being cared for meet IRS eligibility guidelines.
Actual care cost limits
The first thing to keep in mind is that the credit probably will not pay for all of your child care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then this amount is further reduced based on your overall income (more on this later).
There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.
In the case of Janie and Jimmy, their folks could count the $2,800 for Janie's care and $3,200 for Jimmy's in order to claim a total of $6,000, instead of only $5,800 by adding $2,800 plus $3,000. By using the total amount rather than splitting the actual costs and then applying the limits and figuring the credit, they'll get a larger tax break.
Percentage restrictions
The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.So regardless of how much you pay, the potential maximum child and dependent care credit is $1,050 (35 percent of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35 percent to 20 percent of your allowable care costs.
The 35-percent rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20 percent for those earning more than $43,000.
And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable.
For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you won't get the extra $300 as a refund.
Defining dependents
If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.The youngster must be younger than 13. He or she also must meet the requirements set out in the IRS' dependent requirements. Basically, this means the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so read the tax filing instructions carefully or consult your tax adviser if this is your situation.