Hey, Mom and Dad, bet you’re thinking the same thing as most parents around this time of year: "I can’t wait for school to start!"
For kids, summer recess may mean “no more teachers, no more books,” but for working parents it can present a challenge. That’s because one of the unspoken benefits of school is that, theoretically, you know where you children are and what they’re doing for a good part of the day.
If you a) sent your kids to day camp this summer or b) paid someone to mind them so you could go to work — you are entitled to a tax break. In fact, since it’s a tax credit as opposed to a tax deduction, it can potentially shave hundreds of dollars off your 2006 income tax bill.
The credit ranges from 20 to 30 percent of the amount of money you spend on childcare. Importantly, there is no income “cap;” you can qualify for some amount of credit regardless of how high your income is. The maximum expense you can consider per child is $3,000, with a limit of $6,000 for two or more kids.
For example, Sam and Sophie Smith are both employed outside the home. Sam works part-time and Sophie works full-time. They pay Sam’s mother, who lives with them, $4,000 to watch their 7-year-old twins over the summer.
Sam and Sophie’s gross income is $55,000, which means the factor they’ll use to calculate their credit it 20 percent. When they file their 2006 tax return, they can reduce their tax bill by $800 ($4,000 x 20 percent).
If Sam and Sophie’s gross income were $550,000, they could still subtract $800 from their tax bill.
The childcare can be provided in your home or at another site, but overnight camp doesn’t qualify. In addition, the child must be under age 13.
As the above example illustrates, payments made to a relative count, even if this individual lives in your home. However, the person providing the care cannot be someone you also claim as a “dependent” on your tax return (such as your 20-year-old son who is a college sophomore). Even if you don’t claim them as a dependent, the care provider cannot be another child of yours who is under the age of 19.
Needless to say, payments made to your spouse also do not qualify.
If you’re married, you have to file a joint return to get this credit. However, if you’re legally separated, you may still qualify even if you file your taxes “married/separate.”
A word of caution: if you’re claiming the babysitting money you give grandma as an expense on your tax return, she’d better be declaring it as income on hers.
For more information, go to www.irs.gov and look up Publication 503, “Child and Dependent Care Expenses.”
Hope this helps,
If you have a question for Gail Buckner and the Your $ Matters column, send them to: firstname.lastname@example.org, along with your name and phone number.