Written by: Steven J. Fromm, J.D., LL.M. (Taxation)
In the summer, parents who work are look for activities for their children to keep them occupied and supervised. The possibilities include sending a child to day camp or overnight camp. Parents faced with figuring out how to afford the price tag of these activities may wonder whether some or part of these costs may be tax deductible.
At least two possible tax breaks should be considered: the dependent care credit in most cases, and the deduction for medical expenses in certain special situations.
Dependent Care Credit
To qualify for the dependent care credit, the following tests must be met:
- The expenses must be employment-related, and
- The child also must be under age 13 unless he or she is disabled.
The child care expenses must enable the parent to work or to look for employment.
- Overnight camp: The IRS has indicated that the costs of sending a child to overnight camp are not employment-related.
- Day Camp: The costs of sending a child to day camp are treated like day-care costs and will qualify as employment-related expenses (even if the camp features educational activities).
- Summer School or Tutor: At the same time, the costs of sending a child to summer school or to a tutor are not employment-related and cannot be deducted even though they also watch over your child while you are at work.
Allocation of costs:
- In some situations, the IRS requires that expenses be allocated between child care and other, non-qualified services.
- However, the full cost of day camp generally qualifies for the dependent care credit, without an allocation being required.
- If the parent works part-time, camp costs may only be claimed for the days worked. However, if the camp requires that the child be enrolled for the entire week, then the full cost qualifies.
Example. Tom works Monday through Wednesday and sends his child to day camp for the entire week. The camp charges $50 per day and children do not have to enroll for an entire week. Tom can only claim $150 in expenses. However, if the camp requires that the child be enrolled for the entire week, Tom can claim $250 in expenses.
Documentation: Save receipts and paperwork as a reminder when filing your 2012 tax return. Remember to note the Employee Identification Number (EIN) of the camp as well as its address and the dates attended.
Amount of Dependent Care Credit
The maximum amount of employment-related expenses to which the child care credit may be applied is $3,000 if one qualifying individual is involved or $6,000 if two or more qualifying individuals are involved.
If you earn over a certain amount, the credit may be reduced. The credit amount is equal to the amount of qualified expenses times the applicable percentage, as determined by the taxpayer's adjusted gross income (AGI).
Taxpayers with an AGI of $15,000 or less use the highest applicable percentage of 35 percent.
For taxpayers with an AGI over $15,000, the credit is reduced by one percentage point for each $2,000 of AGI (or fraction thereof) over $15,000
The minimum applicable percentage of 20 percent is used by taxpayers with an AGI greater than $43,000.
Bottom line: those with higher incomes are entitled to a maximum child care credit for one qualifying dependent is $1,050 and $2,100 for two or more qualifying dependents.
The cost of camp generally is not deductible as a medical expense. The cost of providing general care to a healthy child is a nondeductible personal expense.
Example. The child's mother works; the child's father is ill and cannot take care of the child. The cost of sending the child to summer camp is not deductible as a medical expense; however, the costs may still qualify for the dependent care credit.
However, camps specifically run for handicapped children and operated to assist the child may come under the umbrella of medical expenses. The degree of assistance is usually determinative in these situations.
Flexible Spending Accounts
Day care and dependent care costs also may be reimbursed by a flexible spending account (FSAs) under an employer-sponsored arrangement.
FSAs allow pre-tax dollars to fund the account up to specified maximum.
Each FSA may limit what it covers so check with your employer before assuming that day camp or similar child care is on its list of reimbursable expenses.
Be aware that the cost of sending a child to camp can be treated as support, for claiming a dependency exemption. For a parent to claim a dependency exemption, the child cannot provide more than half of its own support.
The rules on the deductibility of camp costs are somewhat complicated, especially in borderline situations. Please check with this office if you have any questions.