The refrain from the old song in "Porgy and Bess" is "Summertime and the livin' is easy." But it's not so easy during the summer months for working parents who have to make child care arrangements now that their young kids are out of school. At least they may be able to defray part of the cost by claiming the dependent care credit, otherwise known as the "child care credit."
However, be aware that the credit isn't available for all summertime expenses. Inform your clients about the nuances in the rules.
For starters, the child care credit may be claimed for the cost of caring for qualified children under age 13 while you (and your spouse, if married) are gainfully employed. Generally, this means that at least one spouse must work full-time if the other works part-time. However, the definition of being "gainfully employed" also covers a situation where one spouse works full-time and the other is a full-time student.
The credit percentage depends on your adjusted gross income (AGI) under a sliding scale. It is 35 percent for taxpayers with an AGI of $15,000 or less and gradually reduces until it reaches 20 percent for a couple with an AGI of $43,000 or more. The maximum amount of expenses allowable for the credit is $3,000 of the cost for caring for one child, and $6,000 for two or more children. However, expenses eligible for the credit are further limited to the taxable income of the lower-earning spouse, if that comes to less. (For a full-time student, the IRS uses a monthly figure of $250 as earnings.)
Therefore, assuming your clients are a working couple with a joint AGI above $43,000, the maximum child care credit they can claim is $600 for one child, and $1,200 for two or more children. Nevertheless, the credit can offset their federal income tax liability on a dollar-for-dollar basis.
What types of expenses qualify for the child care credit? As you might expect, this includes the cost of day care centers, nursery schools, babysitters and household workers who spend time caring for a child, like a nanny or housekeeper. You can also claim the credit for payments to relatives who are not your dependents, such as an elderly parent, even if they live in your home. However, do not count any amounts paid to:
- A dependent for whom you (or your spouse if filing jointly) can claim an exemption.
- Your child who was under age 19 at the end of the year, even if he or she is not your dependent.
- A person who was your spouse any time during the year.
- The other parent if you are one of the parents of the child.
What if you send your child to a summer camp? The cost of such a camp qualifies as long as the child doesn't stay overnight. This includes costs of attending as specialty camp such as one training a child for athletic pursuits like baseball or tennis.
Finally, what happens when the summer is over? If you haven't reached the maximum credit for your situation, you can add on expenses for after-school care as long as those expenses are required for gainful employment.