School’s Out: Tax-Saving Opportunities for Summer (and Year-Round)
Senior Tax Accountant, Doni Dror
Summer typically brings clear skies, warm weather, and more sunshine. But if you're a working parent with a young child, summer can be a stressful time. Without school to keep your child busy throughout the day, it can be difficult to work and care for your child. Many parents hire a nanny or bring their children to summer camp to alleviate some of that parental stress.
These services can be expensive, especially for the full 8-10 weeks of vacation. Luckily, the IRS provides a tax credit for childcare expenses if certain conditions are met. This can ease the financial burden of childcare, and still allow for your child to have a memorable summer vacation!
What is the Credit?
The Child and Dependent Care Credit is 50% of your qualified childcare expenses, up to $1,050 (of a tax credit) for a single child or $2,100 for two or more children (the American Rescue Plan raised these limits for 2021 ONLY to $4,000 and $8,000 respectively). This is a tax credit, and not a tax deduction, meaning you get a $0.50 reduction in your federal tax bill for every $1.00 spent on childcare up to the limit.
What Kind of Childcare Expenses Qualify?
The IRS is very liberal with its interpretation of childcare in this regard. The IRS has very few limitations on the childcare provided:
The expenses cannot be for tuition or instructional education (summer school or tutoring).
-The expenses cannot be provided by an immediate family member.
-The expenses cannot be for overnight camps.
-The expenses must have been for a child under the age of 13, or a dependent incapable of caring for themselves.
All of the following should be eligible for the credit: day camp, babysitters, after-school programs, and pre-school.
Who can Claim the Childcare Credit?
The taxpayer parent must meet all of the following criteria to claim the Childcare Tax Credit:
-If married, the Taxpayer's parent must file a joint return (subject to a few exceptions).
-The Taxpayer (and Spouse, if applicable) must either have earned income or proof they have been searching for work.
Like many deductions and credits, the Child and Dependent Care Credit is subject to a phase-out base on the taxpayer's Adjusted Gross Income (AGI). You receive the full 50% credit if your AGI is below $125,000, and gets reduced by 1% for every additional $2,000 of AGI until $183,000 which allows a 20% credit. The 20% credit remains static until $400,000 and then the 1% reduction continues for every $2,000 of additional income. The entire credit is phased out for taxpayers with an AGI of over $438,000.
This calculation can be confusing, so below is a table of each AGI Threshold. Bear in mind these numbers are for the 2021 Tax Year, and do change:
The Child and Dependent Care Credit can save families money on taxes for expenses many parents with young children have every year regardless.
Be sure to consult with a Tax Professional to see if you qualify.