Summer isn’t all about fun in the sun. With warm weather and good times comes extra costs: including (if you’re a parent) daycare for your children. Spending more money is never a comforting thought, but there is light at the end of the tunnel: a potential tax credit that can trim your tax liability next April. Properly claimed, the Child & Dependent Care Credit could equate to considerable tax savings.
Here are 5 important facts about this tax credit for child care expenses:
The Child & Dependent Care Credit
First, some basic information about the credit itself. It’s called the Child & Dependent Care Credit. The IRS covers the ins and outs extensively in an article on the credit, but we’ll summarize the key points here:
- The care must be provided for a qualifying person who is your dependent under the age of 13 when care was provided. Note: Care may also be provided for your spouse or certain other dependents who are physically and mentally incapable of self-care.
- Your child or qualifying person must be in summer camp or daycare so that you can work or look for work (not just because you don’t feel like watching them).
- Your tax filing status must be single, married filing jointly, head of household, or qualifying widow(er) WITH a dependent listed on your return.
- The child must have lived with you for more than half of the tax year in question (2011, in this case).
- The care provider must be identified in your tax return and CANNOT be your spouse, the parent of your qualifying person, or your dependent child under the age of 19 by the end of the tax year.
Overnight Camps Don’t Qualify
Many parents will be relieved to hear that summer camp expenses can be deducted from their taxable income on 2011’s return. Unfortunately, there is a small caveat. While day camps (and daycare facilities) are eligible for deduction, overnight “stay-away” camps are not. Attempting to deduct overnight camp expenses via the Child & Dependent Care Credit could land you in serious trouble in the event of an audit later on.
Home Babysitter or Daycare Facility?
Other parents will ask whether the credit applies only to established day care centers and summer camps, or whether it also applies to at-home babysitters. Luckily, it applies to both. So long as you meet the requirements for the Child & Dependent Care Credit, it does not matter whether the care is provided by a facility or a personally chosen babysitter. You simply need to provide your babysitter’s Social Security number on Form 2441.
What if your babysitter doesn’t provide their Social Security number, or you can’t track them down in time to file your return? The IRS says:
Answer: If you meet the other requirements to claim the child and dependent care credit, but are missing the social security number or taxpayer identification number of a provider, you may still try and claim the credit by demonstrating “due diligence” in attempting to secure this information. To prove you used “due diligence”, request that your day care provider fill out Form W-10, Dependent Care Provider’s ID and Certification to request the necessary information. If this form is not used, you can use the following sources:
- Copy of the provider’s social security card.
- Copy of the provider’s completed Form W-4, Employee’s Withholding Allowance Certificate.
- Copy of a statement furnished by your employer if the provider is on your employer’s dependent care plan.
- Letter or invoice from provider.
The taxpayer must provide whatever information is available about the provider (such as name and address) on Form 2441 (PDF),Child and Dependent Care Expenses. Write “see page 2” in the columns requesting the missing information. Write at the bottom of page 2 that the provider refused to give the requested information. Daycare providers who refuse to give the necessary information will face penalties.
Please note, if the daycare provider is a tax-exempt organization, such as a school or church, then you do not have to show the taxpayer ID number. You can write “tax-exempt” in the space where the number is required.
35% of Qualifying Expenses
A common misconception about the Child & Dependent Care Credit is that you can deduct ALL of your qualifying expenses. This is actually untrue. You are only eligible to deduct 20%-35% of qualifying expenses, depending on your adjusted gross income. The higher your adjusted gross income, the lower the percentage of the deduction.
The rules have not yet been changed for 2011, but last year, the requirements were:
- You may use up to $3,000 of expenses paid during the tax year for one qualifying individual, OR $6,000 for two or more qualifying individuals to figure out the deduction.
- Those qualifying expenses MUST be reduced by any tax deductible dependent care benefits given to you by employers. In other words, if your job provides you with $500 of care benefits, your deduction under the Child & Dependent Care Credit must be reduced by $500.
Other Creditable Expenses
Daycare or babysitting fees are the main deductible expenses, but they are not the only ones. You are also eligible to write-off the costs of ancillary services related to care, such as meal preparation or even housecleaning (if you hire a qualifying at-home babysitter.) The key to doing this successfully, as with other credits and deductions, is keeping extremely solid records.
The IRS knows how easy it is for unscrupulous taxpayers to invent “costs” out of thin air. Being targeted with an audit could mean the IRS is suspicious of that. The only way to protect yourself is with hard documentation proving your write-offs were valid. Our blog post Would Your Tax Records Survive a Natural Disaster was written precisely because records are so important – don’t neglect them when deducting summer care costs!
For more information related to this topic also check out our blog, Writing Off Your Summer: Preparing for Next Tax Season and Who Can I Claim as a Dependent for This Tax Year.