As we approach mid-summer, many children are heading to the local lakes and forests to attend day camps. Although these camps can be expensive, the costs may qualify for the child and dependent care tax credit.
The child and dependent care tax credit is a nonrefundable credit aimed at recovering part of the expenses of providing care for children during the day while parents are working. While most often used for the costs of daycare, expenses related to sending children to summer day camps may also qualify. It is worth noting that, since the purpose of the credit is to enable parents to remain employed during working hours, expenses of overnight camps do not qualify. Additionally, to qualify, the child must be under the age of 13.
Amount of the Credit
For 2016, the maximum amount of child care expenses on which the credit can be claimed is $3,000 for one qualifying child and $6,000 total for two or more qualifying children. The amount of the credit allowed depends on the adjusted gross income (AGI) of the child’s parents. Taxpayers with an AGI of $15,000 or less are permitted a credit of 35% of qualifying costs incurred up to the limits listed above. For every increase of $2,000 in AGI up to $43,000, the credit is reduced by 1%. For taxpayers with an AGI greater than $43,000, the credit is limited to 20% of the qualifying expenses up to the limits listed above. Additionally, qualifying expenses cannot exceed the earned income of the person claiming the credit. For married taxpayers, qualifying expenses cannot exceed the earned income of the lowest-earning spouse.
To illustrate the above, assume married taxpayers filing jointly with an AGI of $60,000 have a four-year-old child. They pay $200 per month for child care while they work. In addition, the child attended a day camp costing $150. So, the total spent for qualifying child care totaled $2,550 ($200 x 12 months + $150). With an AGI exceeding the $43,000 threshold, their credit is limited to 20% of the qualifying expenses. Thus, their tentative credit is $510 ($2,550 x 20%). If they have a tax liability at the end of the year, it will be reduced by $510. If they are due a refund, then the credit cannot be used to increase their refund.
How to Claim
Provide your CPA with receipts, invoices, or a listing of the total costs incurred that meet the qualifications mentioned above. Include the name of each care provider, the total amount paid to the care provider, the care provider’s address, and the tax identification number of each care provider.
We’ll be happy to help you determine how much of the credit you can claim based on your unique tax situation.