Summertime is almost here, and that means vacations, BBQs and baseball games. But often, it means scrambling to figure out what your kids are going to do during the summer break – especially if you’re a working parent!
Now is the time to ensure your child has something safe and fun to do. Don’t forget that some of those fun activities might make you eligible for a tax credit. Here are five criteria you must meet in order to claim a credit on your income tax return for any 2021 child and dependent care expenses:
- Qualifying Person. The care must be for a child under the age of 13, or a spouse or other dependent who lived with you for more than half the year and is physically or mentally incapable of self-care.
- Work-Related Expenses. The care must be necessary, enabling you or your spouse to work or look for work.
- Qualifying Care Provider. Summer day camps, sports camps, nursery school, preschool and similar pre-kindergarten summer programs are considered qualifying childcare by the IRS, but overnight camps are not. You may qualify for the credit, even if the childcare provider is a sitter in the home. However, neither you, your spouse, nor any of your other dependents qualify as providers for the purposes of this credit.
- Earned Income. You must have earned income like wages or income from a business during the tax year. If you file jointly, your spouse must meet the same criteria, with special rules applying to a spouse who is a student or disabled.
- Credit Percentage and Expense Limits. The credit is worth between 20 percent and 35 percent of your allowable expenses depending upon your income. The dollar limitations on eligible expenses for 2021 are $8,000 if you have one qualifying child, and $16,000 if you have two or more children. These limits are significantly higher than in previous years, which makes tax planning even more important.
A big change for 2021 is the Child and Dependent Care Credit is now refundable, meaning you can get money back if the credit exceeds your tax liability. For instance, if your tax liability before the credit was $500, but your allowable expenses delivered a $750 tax credit, you’ll be able to pocket the full value of the credit, including the $250 excess.
There are several rules that define what’s considered a work-related expense, the identification of the care provider, the type of care provided, earned income requirements, and more. It can get tricky, which is why it’s so important to talk to a tax professional when attempting to qualify for the credit.
The bottom line is, if you’re a working parent with school-age children you can use the Child and Dependent Care Credit to help balance the high cost of summertime activities. Reach out to the network of CPAs, enrolled agents, and tax professionals at Padgett for a consultation and let us help you get your summer plans in order.