Summer child care costs could earn parents a $2,100 tax credit
Before school ends for the summer, parents have some homework to do: making summer child care arrangements. Although there is a lot to weigh, the child care tax credit reduces parents’ taxes dollar for dollar and could tip the scale for parents deciding on the best option. It could be an especially important factor for parents who do not have eligible child care expenses during the school year and would not be able to claim the credit otherwise. More than 7.1 million parents claimed this nonrefundable credit in 2013, and with a $2,100 maximum value for two eligible children, it can be a valuable way to help offset child care expenses.
Child care the important part of summer child care arrangements
Some common summer expenses, like in-home caregivers, day care facilities and some day camps, could count toward the child care credit. But not every arrangement qualifies. The purpose of the expense must be for the child’s well being and protection. For example, summer school or tutoring expenses would not count because they are educational expenses. But day camp expenses could qualify, even if the camp has an educational component (like science camp). And the cost of a babysitter or nanny – even if they also do household work – could qualify because they are at least partly for the care of the child.
Summer child care must be related to parents’ work
In addition, the care must allow the parent, or parents if married filing jointly, to work or look for work. That may seem straightforward, but it can get complicated for more complex life and work situations. For example, parents who work part-time or part-year can claim the credit for expenses only while they work, but parents who work nights may claim the credit for expenses during the day while they sleep. Unemployed parents who earn no income cannot claim the credit, but parents who are full-time students without income may. When life isn’t straightforward, it is best to consult a tax professional.
Credit based on a sliding scale of summer child care costs
The size of the credit changes depending on the number of children, the amount of eligible expenses and the parents’ income. If they earn less than $15,000, parents can claim the maximum credit of 35 percent of their eligible expenses. The credit falls to 20 percent of eligible expenses for parents with incomes of more than $43,000. Eligible annual expenses are capped at $3,000 for one child and $6,000 for two or more.
How to choose the right tax benefit for summer child care costs
The child care credit is just one of a few tax benefits that can help parents pay for child care. For example, an employer-sponsored dependent care Flexible Spending Account (FSA) allows the parent to save up to $5,000 pretax to use toward child care expenses. This means parents in the 25 percent tax bracket could reduce income taxes by $1,250 by fully funding their FSA. The work requirements are the same for the employer benefit and the care credit.
However, parents cannot “double dip” and use funds from their dependent care FSA to qualify for the child care credit. Their income and expenses will likely determine which tax benefit will maximize their savings. For help choosing between tax benefits or for help understanding the tax consequences of more complex work and child care arrangements, parents should consult a trusted tax professional.
Get tax advice about unemployment benefits and how they may affect you when it comes time to file your 2020 taxes. Read more.
Certain tax benefits may help you as you transition from one job to another or from unemployment to the workforce. Review this list from H&R Block’s experts.
Learn more about how the recovery rebate credit works and who may be eligible to claim additional stimulus money at tax time.