New shoes, pencils, notebooks, backpacks, erasers and highlighters... These were just a few of the things on our back-to-school list this year. It’s certainly a big expense to send someone off to the first grade! I wish I could offer some advice for finding a tax deduction for school supplies but I’m not that creative. I can however offer you some advice on tax savings related to your summertime childcare expenses.
If your children spent any time this summer at day camps (no overnight camps), at home with a sitter or at any daycare facility outside of your home, you may qualify for a the Child and Dependent Care Credit. As a matter of fact, it doesn’t matter what time of year you need childcare... if you pay someone to care for your dependent who is under the age of 13, the credit could be up to 35% of your expenses. It is important to note that these expenses must be paid so that you can work or look for work. If you qualify, the credit can be calculated against expenses up to $3,000 per qualifying child or $6,000 if you have two or more qualifying children. According to the IRS Publication 503, the following tests must be met to qualify for the credit:
- The care must be for one of more qualifying persons who are identified on the form you use to the claim the credit (Form 2441)
- You (and your spouse if married) must have earned income... but special rules apply if you are a student or if your spouse is unable to care for him or herself.
- You must pay child care expenses so you can work or look for work
- You must make payments for child and dependent care to someone you cannot claim as a dependent
- Your filing status must be single, head of household, qualifying widow(er) with dependent child or married filing jointly (unless an exception applies to you).
- You must identify the care provider on your tax return
- If you have dependent care benefits, the total you exclude or deduct must be less than the dollar limit for qualifying expenses.
So now that you know that you may have an opportunity for some tax savings, what will this mean for you at tax time? The Child and Dependent Care Credit is a non-refundable credit. A tax “credit” can often be confused with a tax “deduction”. While a tax deduction reduces the amount of income subject to income tax, a tax credit will reduce the amount of tax you are responsible for paying in any given year. That being said, a non-refundable credit like the Child and Dependent Care Credit will reduce your tax obligation dollar for dollar until your tax obligation reaches zero.
Last but not least, make sure you have the proper records in place to claim the credit. You’ll want to hold onto any receipts or invoices from the day camps or programs your child was part of this summer. You’ll need a Tax ID number from the care provider along with proof of the amount you paid to have them take care of your little ones. Enjoy the new school year... it’s sure to fly by just as quickly as this summer did!