School is out for the summer, and you are trying to keep your kids entertained! Did you know that day camps are eligible for a tax break? Remember when your kids were younger and in full-time daycare, you received a credit on your tax return? This is the same credit – it’s also available for day camps! Here are the details.
The value of a credit
Day camp is a qualified expense under the child and dependent care credit, which is worth 20% to 35% of qualifying expenses, subject to a cap. Note: camps that require an overnight stay do not qualify.
For 2019, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. Other expenses eligible for the credit include payments to a daycare center, nanny, or nursery school.
Keep in mind that tax credits are especially valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax.
For example, if you’re in the 32% tax bracket, $1 of deduction saves you only $0.32 of taxes. So it’s important to take maximum advantage of all tax credits available to you.
For an expense to qualify for the credit, it must be related to employment. In other words, it must enable you and your spouse to work — or look for work if you’re unemployed. It must also be for the care of your child, stepchild, foster child, or other qualifying relative who is under age 13, who lives in your home for more than half the year and meets other requirements.
There’s no age limit if the dependent child is physically or mentally unable to care for him- or herself. Special rules apply if the child’s parents are divorced or separated or if the parents live apart.
Credit vs. FSA
If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), you can’t use expenses paid from or reimbursed by the FSA to claim the credit. Common question – which is better – claiming the credit or using a FSA?
If your employer offers a child and dependent care FSA, you may wish to consider participating in the FSA instead of taking the credit. With an FSA for child and dependent care, you can contribute up to $5,000 on a pretax basis. If your marginal tax rate is more than 12%, participating in the FSA is more beneficial than taking the credit. That’s because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with adjusted gross income over $43,000 is limited to 20%.
Proving your eligibility
You cannot claim a dependent credit unless you have Social Security number of each child who attended the camp or received day care. You must also identify the organizations or persons that provided care for your child. So make sure to track down the camp/provider’s address and taxpayer identification number.
Let’s work through an example
You and your husband work full-time, and your combined adjusted gross income (essentially your total taxable income less self-employment taxes and retirement contributions) is about $70,000. You have two kids, ages 7 and 9. Your 7-year-old loves soccer, so you decide to find a soccer day camp to keep him entertained while you and your husband work. The cost of the camp is $400. Your 9-year-old is very hands-on, so you find a kids engineering day camp to keep him entertained while you and your husband work. The cost of this camp is $600. On your 2019 tax return, you would need to list each child and their social security number, along with the camp information and identification number. The total qualified expenses would be $1,000 ($400 + $600). You are eligible for up to $6,000 of expenses ($3,000 per child with a maximum of $6,000). Your adjusted gross income is over $43,000 so the credit amount is 20% of qualified expenses. Qualified expenses of $1,000 * 20% = $200. Let’s say you found more camp opportunities, and therefore had qualified expenses of $6,000, then your credit would be $1,200 ($6,000 * 20%). That’s essentially a 20% discount on the first $6,000 of qualified expenses!
Additional rules apply to the child and dependent care credit. Please contact us if you have questions. We can help determine your eligibility for the credit and other tax breaks for parents.