Child and Dependent Care Credit
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 payment is a deductible expense and what is not?
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.
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 deductible 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.
Deductible Expenses – Camp to Day Care
To qualify for the credit, deductible 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 all 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 not 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.
Fawn Choate is a QuickBooks Pro Advisor and the owner of The Office On The Go, a bookkeeping firm based in Marblehead, MA. She specializes in working with small to medium size businesses with their bookkeeping and accounting needs. She can be reached at firstname.lastname@example.org or by visiting the website, www.theofficeonthego.com.