Child Care Expenses
Child care expenses for work: summer camp to after-school programs to babysitting: what's deductible and what's not
With school out for the summer, working parents will not only need to arrange care for their children while at work, but how to do so in a cost effective way. For parents facing a summer season that requires juggling childcare and work (or finding work), the IRS provides a few tax breaks that can help make this balancing act a little less painful to the pocket. From the cost of day camp to summer school, how do you determine what kind of childcare is deductible and what is not? Let's take a look.
Child and dependent care credit
The child and dependent care credit is a popular credit that, in part, enables you and your spouse (if married) to reduce your taxes by the cost of certain qualifying expenses you incur to have someone care for your child or children who are under age 13 so that you can work or look for work. While the credit applies to a wide range of childcare services, there are a variety of popular childcare services that do not qualify. Not only are there limits on the types of care and services that qualify, but the credit is also subject to income and percentage limitations as well.
Eligibility and amounts
For 2008, you can claim up to $3,000 of expenses paid in the year for one qualifying individual, or $6,000 for two or more qualifying individuals, under the dependent and child care credit. However, as discussed below, the credit can only be taken for up to 35 percent of qualifying expenses. This means that you essentially will not be able to claim the full $3,000/$6,000 amount. Additionally, to be eligible for the credit, you and your spouse must meet certain conditions, including:
- You and your spouse (if married) must have earned income from wages, salaries, tips, other taxable compensation, or net earnings from self-employment for the year;
- The expenses must be made for children age 13 or younger;
- The expenses must have been incurred to enable you and your spouse to work or look for work (unless you or your spouse is a full-time student or incapacitated);
- The care payments must be made to someone you and your spouse cannot claim as a dependent; and:
- Your child must have lived with you for more than half of the year.
Percentage and more restrictions
Another restriction limits the actual credit amount you can take to a percentage of your expenses. Depending on your income, the credit can reach up to 35 percent of your expenses. Thus, the potential maximum credit you can claim for 2008 is only $1,050 (35 percent of $3,000) for the care of one qualifying child, and $2,100 for the care of two children under the age of 13. The credit falls to 20 percent as your income level rises (at $43,000 adjusted gross income, the credit falls to 20 percent of expenses). Additionally, the child and dependent care credit is nonrefundable, meaning that any excess credit can not be carried over and used in later years to reduce your tax bill.
The $3,000 and $6,000 credit amounts must be further reduced by any child and dependent care benefits that your employer provides and that you exclude from your income.
Camp to day care, what expenses qualify?
To qualify for the credit, expenses must be incurred for the "care" of your child. With the dollar and percentage limitations, the child and dependent care credit will likely not pay for
of the expenses you incur to have someone care for your child (or children) when you're at work, or looking for work this summer. The IRS considers expenses are "for care" if their main purpose is the individual's well-being and protection.
Expenses that do
qualify for the child and dependent care credit:
- Kindergarten (the IRS considers both full-time and part-time kindergarten a non-qualifying educational expense);
- Overnight camp;
- Summer school;
- Tutoring programs; and
- Private school.
Expenses that qualify for the child and dependent care credit:
- Day camps or similar programs (even if the camp specializes in a particular activity, such as reading, writing, tennis, or computer skills);
- Nursery school, pre-school, or similar programs for children below the kindergarten level;
- Expenses for before- or after-school care of a child in kindergarten or higher may be expenses for care;
- Fees you paid to an agency to obtain services of a care provider; and
- Indirect expenses, such as application fees, agency or pre-school deposits, that you paid for purposes of obtaining child care.
Flexible Spending Accounts
Instead of taking the child care credit, consider taking advantage of a flexible spending account that covers dependent care expenses. Employers who allow medical flexible spending accounts usually have one for dependent care as well. Contributions are pre-tax and, unlike the child and dependent care credit, they are not limited by adjusted gross income. If you take the credit, however, you can't double dip and pay for the expenses through a flexible spending account.
Some employers go one step better for their employees than sponsoring a dependent care flexible spending account: they provide on-the-premises day care facilities. If set up properly, it can be a win-win for employers and employees.