Now that summer 2015 is officially here and the main filing season is out of the way, tax planning may be far from your mind. However, typical summer traditions can yield tax benefits. For example, when school lets out for the summer, some parents may decide to send their young children to summer camp. Whether parents do this to supplement their children’s education, enhance their athletic skills, provide social opportunities, or simply to get them out of the house, some working parents may be able to deduct certain expenses associated with the cost of sending children to day camp. That’s where the child care and dependent credit under Code Sec. 21, might especially come into play.
Child Care and Dependent Credit Basics
A taxpayer, who incurs expenses to obtain day care for child under age 13 so that the taxpayer and his or her spouse can be gainfully employed (or look for gainful employment), may be able to claim the child care and dependent tax credit on Form 1040, (line 49), Form 1040A (line 31), or Form 1040NR (line 47). Taxpayers may also claim the credit for expenses paid for care for certain other qualifying individuals, such as physically or mentally incapacitated dependents.
Taxpayers who qualify for the child and dependent care tax credit must claim it by completing and filing Form 2441, Child and Dependent Care Expenses, along with their tax returns. Taxpayers may not claim the credit if they file a Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents.
A taxpayer who qualifies may claim a credit in an amount between 20 to 35 percent of employment-related child care expenses. Such expenses can include the cost of sending a child to day camp, something that can run up a hefty bill of more than $100 or $500 per week!
In general, to claim the child and dependent care credit, the taxpayer must meet the following requirements:
The taxpayer must live with the child(ren) or qualifying person(s) for more than half of the tax year;
The child and dependent care expenses must be incurred to allow the taxpayer to work or look for work. (If the taxpayer or the spouse is a stay-at-home parent, unfortunately, the child care costs are nondeductible);
The taxpayer must have income from work during the year. (The amount of the employment-related expenses taken into account in calculating the child and dependent care credit may not exceed the lesser of the taxpayer’s earned income or the earned income of his spouse if the taxpayer is married at the end of the tax year);
The taxpayer must have made payments for child and dependent care to someone the taxpayer or his spouse could not claim as a dependent. If the person to whom payments were made was the taxpayer’s child, the child must have been 19 or over by the end of the year;
If married, the taxpayer must file a joint return (unless an exception applies);
The taxpayer must include the taxpayer identification number of the qualifying individual on the return;
The taxpayer must provide specified information regarding service providers, including the name, address and taxpayer identification number (TIN) of the provider (no TIN is required if the provider is a tax-exempt organization);
A taxpayer must substantiate any child and dependent care credit claimed by providing adequate records or other sufficient evidence of work-related expenses, etc.
Summer Camp Costs
Because day camp is comparable to day care, the IRS allows taxpayers to factor in the costs of sending a child to day camp when determining the amount of the child and dependent care credit they may claim. The cost of sending a child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers, music, football, or soccer. Furthermore, taxpayers are not required to seek out the least expensive day camp option in order to claim the credit. The IRS regulations provide that “the manner of providing care need not be the least expensive alternative available to the taxpayer.”
Reg. §1.21-(1)(d)(6) provides that the cost of sending your child to an overnight camp, however, is not considered a work-related expense. Similarly, summer school and tutoring programs are not considered to be for the care of a qualifying individual and the costs are not employment-related expenses.
The regulations under Code Sec. 21 provide two examples intended to outline the distinction between a summer day camp, for which expenses are deductible, and a tutoring program, for which expenses are nondeductible. They state: To be gainfully employed, N sends her 9-year old child to a summer day camp that offers computer activities and recreational activities such as swimming and arts and crafts. The full cost of the summer day camp may be for deductible care. In contrast, to be gainfully employed, O sends her 9-year old child to a math tutoring program for two hours per day during the summer. The cost of the tutoring program is not for deductible care.
According to the IRS, the question of whether or not an expense qualifies for the dependent care credit depends on the nature and primary purpose of the services provided and is primarily a question of fact. In order for an expense to qualify in full for the dependent care credit, any portion of the expense for purposes other than care must be minimal or insignificant and inseparable from the portion of the expense for care. If a significant portion of the expense is for purposes other than care, an allocation must be made as to which portion of the costs are for deductible care and which portion of the costs are for other purposes. An expense that is primarily for a purpose that is not care, such as education, does not qualify for the dependent care credit.
Amounts paid for clothing, schooling and entertainment are not considered qualified expenses for purposes of calculating the child care and dependent credit. However, if these amounts are incidental to and cannot be separated from the cost of caring for the qualifying person, the regulations provide that these expenses can be counted toward the credit for qualified dependent care. This means that costs to purchase clothing, horseback riding chaps, soccer cleats, football padding, violin strings, or other gear that may be used by the child while at the day camp are nondeductible because they are technically personal in nature and not for the well-being of the child. However, if the day camp provides a lunch and snacks to the children attending the day camp, the regulations provide that the cost of this lunch and the snacks may be included in the cost of care for the child if they are incidental to and inseparably a part of the care.
The cost of transporting a qualifying individual to a place where care is provided is not generally a qualifying expense unless it is provided by a dependent care provider. If a day camp takes a child or qualifying person to or from the day camp location, that transportation is for the care of the child. This includes transportation by bus, subway, taxi, or private car.
A taxpayer may include the cost of fees paid to an agency to get the services of a day camp provider, including deposits and application fees. However, if the taxpayer changes his or her mind and either does not send the child to day camp or selects another program, any forfeited deposit will not be considered “for the care of a qualifying person” and will therefore become nondeductible.
The amount of the child care and dependent credit is subject to a cap calculated as a percentage of the taxpayer’s employment-related expenses, as well as a dollar limit. A maximum credit of 35 percent of employment-related expenses is available to taxpayers with adjusted gross income (AGI) of $15,000 or less. The credit percentage is reduced by one percentage point for each $2,000 of adjusted gross income, or fraction thereof, above $15,000. The minimum credit percentage is 20 percent, and it applies to a taxpayer with AGI in excess of $43,000.
In addition, the maximum amount of eligible expenses that may be used to calculate the final credit amount is $3,000 for taxpayers with one qualifying individual and $6,000 for taxpayers with two or more qualifying individuals. Therefore, the maximum credit amount is $1,050 for taxpayers claiming expenses for one child and $2,100 for taxpayers claiming expenses related to two or more children.
Any child care benefits provided by an employer will reduce dollar-for-dollar the amount of expenses a taxpayer may use to calculate the credit.
The child care and dependent credit is nonrefundable, meaning that if the taxpayer already has no tax liability for the year in which he or she incurred qualified expenses for purposes of the credit, he or she will receive no tax benefit from claiming the credit.