Article Highlights:
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 Over |
But Not Over |
Applicable Percent |
AGI Over |
But Not Over |
Applicable Percent |
|
0 15,000 17,000 19,000 21,000 23,000 25,000 27,000 |
15,000 17,000 19,000 21,000 23,000 25,000 27,000 29,000 |
35 34 33 32 31 30 29 28 |
29,000 31,000 33,000 35,000 37,000 39,000 41,000 43,000 |
31,000 33,000 35,000 37,000 39,000 41,000 43,000 No Limit |
27 26 25 24 23 22 21 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.
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.