Tax tip: Summer day camp expenses may qualify for a tax credit
By Nick Fiore
Along with the summer come some extra expenses, including (possibly) day camp for children. It may be a pleasant surprise for some parents that the costs of sending their children to these camps may qualify for the child and dependent care tax credit.
Section 21 of the Internal Revenue Code provides for a credit, throughout the year, for child care costs incurred while a taxpayer is gainfully employed.
Many parents who work (or are looking for work) must arrange for the care of their children during the summer months when school is not in session. As such, the cost of day camp may count as an expense towards this credit, even if the camp specializes in a particular activity (such as soccer or computers). However, the costs of overnight camps do not qualify for the credit, nor do summer school or tutoring programs.
Claiming the credit
To be able to claim the credit, a taxpayer must meet several requirements and tests.
Qualifying person. In general, the expenses must be for the care of a person who may be claimed as a dependent by the taxpayer and who was under age 13 at the time the care was provided. Note: The taxpayer must include the qualifying person's name and social security number (or individual tax identification number) on the return on which the credit is claimed.
Earned income. To claim the credit, a taxpayer (and spouse, if filing jointly) must have earned income. This includes wages, salaries, tips, and other taxable employee compensation, and net earnings from self-employment; it also includes strike benefits and disability pay reported as wages. Earned income does not include pensions, annuities, Social Security and retirement benefits, interest and dividends, workers' compensation and unemployment benefits, or child support payments.
Work-related expenses. The camp expenses must be work-related; that is, they must allow the taxpayer (and the spouse) to work or look for work. This work can be work for others or in the taxpayer's own business or partnership. In addition, the work can be either full-time or part-time work.
Joint return. Generally, married couples must file a joint return to claim the credit. However, if a taxpayer is legally separated, he or she may be able to file a separate return and still take the credit,
Provider identification. The taxpayer must identify the person(s) or organization(s) that provide care for the child or dependent. The taxpayer must give the provider's name, address, and taxpayer identification number. If the care provider is an individual, the identification number is his or her Social Security number. If the provider is an organization, the identification number is the organization's employer identification number; if the care provider is a tax-exempt organization (such as a church or a school), the taxpayer need only write "TAX-EXEMPT" in the space in which the number is to be included.
Calculating the credit
The credit is a percentage of a taxpayer's work-related expenses.
Figuring total work-related expenses. Only those expenses paid during the current year may be counted. If a taxpayer paid for services in advance, the prepaid expenses can be counted only in the year in which the care is received.
Earned income limit. The amount of work-related expenses used to figure the credit cannot be more than the taxpayer's earned income for the year (if the taxpayer is single), or the smaller of the taxpayer's or spouse's earned income for the year (if the taxpayer is married, filing jointly). If a taxpayer is legally separated, or is married and living apart from his or her spouse, the taxpayer is not considered married for purposes of the earned income limit.
Note that community property laws are disregarded for purposes of this computation.
The earned income amount will include a taxpayer's net income from self-employment (generally the amount on line 3 of Schedule SE). If a taxpayer has low earnings from self-employment or a net loss, an optional method may be used for this calculation. This method may increase a taxpayer's earned income, which could increase his or her credit. (Note, however: this increase in earned income would, at the same time, lead to an increase in self-employment tax that the taxpayer would be required to pay.)
Dollar limit. Each year, a taxpayer may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals, to figure the credit. This $6,000 amount need not be divided equally among the qualifying persons.
If a taxpayer receives dependent care benefits from an employer, the applicable dollar to be used in the credit calculation limit may be reduced.
Amount of the credit. To determine the credit, a taxpayer must multiply the amount of work-related expenses by a percentage (between 20% and 35%), based on the taxpayer's adjusted gross income
Claiming the credit
To claim the dependent care credit, a taxpayer must use Form 1040, 1040A or 1040NR) as applicable) for reporting income tax. The credit may not be claimed on Form 1040EZ or 1040NR-EZ.
The amount of credit that may be claimed is limited to a taxpayer's regular tax plus any alternative minimum tax; that is, a taxpayer cannot receive a refund for any part of the credit that is more than this limit.