Tax Breaks Can Reduce Cost of Summer Camp
In summertime the living may be easy. But for working parents, it’s far from cheap.
Each year after school lets out, millions of children attend thousands of summer camps so their parents can have day care. The cost can easily run into the thousands of dollars.
In Southern California, for example, about 1,400 kids pour into Tom Sawyer Camps -- a Pasadena-based operation that takes children ages 4 through 13 for eight to 10 weeks. For this, parents pay $2,700 to $4,100.
On the bright side, they can offset a portion of this cost with tax breaks provided by the federal government.
“Anyone who has a child in camp so that they can be gainfully employed can claim a tax break,” said Patty O’Connell of Holthouse, Carlin & Van Trigt, a Santa Monica tax firm.
There are two separate breaks for day-care expenses: One is a credit, which reduces parents’ tax bills by a percentage of their day-care expenses. The other is an “income exclusion,” which works like 401(k) contributions. The money is taken out before taxes are computed, which reduces taxable income and, therefore, income taxes.
Parents can’t take both tax breaks for the same expenses, O’Connell cautioned. They must choose which one would work best for them.
For the child- and dependent-care credit, parents can claim as much as $3,000 a child, or $6,000 total, in day-care expenses. The amount of the credit would be 20% to 35% of those expenses, depending on the parent’s taxable income.
Only those earning $15,000 or less get the full 35%. The percentage allowed goes down as income goes up. For parents with $43,000 or more in joint income, the credit is worth 20% of child-care expenses. So those with income above $43,000 and two qualifying children in day care could get a credit of as much as $1,200 -- $600 per child. That maximum amount would stay the same no matter how high their income.
And remember, a tax credit is especially handy because it is a direct reduction in taxes owed, not just an income adjustment.
For most higher-income parents, however, O’Connell recommends the income exclusion. That’s because it can help taxpayers qualify for other income-tested tax breaks that they might otherwise lose, which can sharply boost the overall benefit.
The exclusion is available only for those who have so-called dependent-care accounts at work. Also known as flexible spending accounts, they allow parents to set aside as much as $5,000 that can be used to pay child-care expenses. You generally must sign up these accounts during your employer’s open-enrollment period for benefits.
Because the money comes out of pretax income, a couple earning $120,000 and contributing the maximum to the account, for example, would lower their taxable income to $115,000. Theoretically, that would save $1,250 in tax -- or 25% of $5,000.
But it actually saves more, O’Connell points out. The reason: This hypothetical couple’s Social Security taxes are reduced too, since they are also based on taxable income.
What’s more, these parents would be able to claim more of another, unrelated tax credit -- the child tax credit. That credit is available to anyone with a dependent child under the age of 17.
But that credit is income-tested, so those earning more than certain amounts lose a portion of the credit. Because dependent-care accounts reduce reported income, they can help parents duck under those thresholds.
A hypothetical couple with two children and $120,000 in income would pay about $18,899 in tax if they were using just the child tax credit and other typical deductions, according to one example devised by O’Connell. But the same couple would pay just $16,884 -- $2,015 less -- if they paid the day-care bills through a dependent-care account.
“It’s a big difference,” O’Connell said. “The numbers give you a compelling argument to use the dependent-care account, if you have one available.”
However, to claim either the tax credit or the income exclusion, parents must have a “qualifying child” and adhere to a number of other rules. Specifically:
* Neither of the day-care breaks can be used for a child who is older than 12, unless the child is physically or mentally disabled. If a child turns 13 during the year, the costs incurred before that birthday qualify for the breaks; those incurred afterward do not.
* If they are married, both parents must work -- or be disabled or full-time students -- to claim either of the breaks. If one parent works just part-time, the expenses qualifying for the break can’t exceed the lower-wage-earner’s income.
* Overnight camps do not qualify for the tax breaks. Only costs related to day camps or day care qualify.
* The camp or child-care provider must have a valid taxpayer identification number. If the provider is an individual rather than a company, that would be his or her Social Security number.
* A tax break can’t be taken for having one dependent take care of another. In other words, parents can’t deduct the cost of paying their 15-year-old to watch their baby. However, a child or other relative who is not a dependent can be a valid day-care provider. So, if the child’s grandmother takes the kids all summer, the parents can pay her and write off the cost on their tax return. The only downside: Grandma would have to pay tax on the pay she received.
Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, go to latimes.com/kristof.
