Summer Camp and the Child Tax Credit

This article has been edited and updated as of 8/5/22, which is important, because this credit changed between 2021 and 2022. It originally appeared in ArtFCity

http://artfcity.com/2017/07/25/summer-camp-a-break-for-taxes-and-parental-sanity/

I’m taking a summertime break from my normal Sunlight Tax duties in order to research and write new tax articles for you, and to direct the summer programming at “camp mom.” I will be showing up throughout the summer with more tips and advice on taxes and personal finance for creative economy workers. In the meantime, in honor of all the working artist parents out there, here’s a post on the tax credit that applies to summer camp.

As any parent of young kids knows, juggling work and childcare is hard. And paid childcare is impossibly expensive. Many budget-conscious artist parents who manage to fit their work into school time hours – and avoid babysitters and after school care – simply don’t have that option come summer. Here’s some good news. If you pay to send your child to summer camp so that you can go to work, that camp expense qualifies for the Child and Dependent Care Tax Credit.

In March 2021, the Child and Dependent Care Tax Credit was expanded. It allowed bigger dependent-care expenses, a higher percentage of them, and more taxpayers qualify to take the credit. While there was an attempt to extend this legislation to 2022 and beyond, the expansion did not pass, so the law has now reverted back to pre-2021 levels.

What is the Child and Dependent Care Tax Credit? It’s a credit meant to help working parents with the cost of childcare. Depending on your income and how much you spend on childcare, the Child Tax Care Credit allows you to take up to 35 percent of your childcare expenses up to $3000 for one child or up to $6000 for 2 or more children as a tax credit. It applies to a host of scenarios and is relatively generous.

Because it’s a tax credit (rather than a deduction), it saves you a lot more money. Let’s review the basics of why a tax credit is better than a deduction: 

A tax deduction means that you may subtract the expense from your taxable income. So if you had $50,000 of income, and had a $1000 tax deduction, you would now have a taxable income of $49,000 ($50,000 income – $1000 deduction).  If you were taxed at the 25% rate, that means that your tax due would drop from $12,500 ($50,000 income x 25% tax rate) to $12,250 ($49,000 income x 25% tax rate). You save $250 ($12,500-$12,250). Deductions lower your taxes.

But compare that to a $1000 tax credit. A tax credit lowers your tax due (not just your taxable income) dollar for dollar. If you make the same $50,000 of taxable income, and are taxed at the same 25% rate, then your tax due is $12,500 ($50,000 income x 25% tax rate). A $1000 tax credit reduces your tax due to $11,500 ($12,500 tax due – $1000 tax credit). So the $1000 tax deduction saves you $250, but the $1000 tax credit saves you $1000. That’s a much bigger impact.

There’s one more wrinkle, which is that some tax credits are “refundable.” When you have a fully refundable tax credit (the Earned Income Tax Credit is one of these), if your tax credit reduces your tax liability past zero, the government will actually send you a refund. In other words, if you owe zero dollars in tax, and you get a $1000 tax credit, you will get $1000 back from the IRS in the form of a refund. A non-refundable tax credit can reduce your tax due down to zero, but if it goes past zero, you lose the rest. The Child Tax Care Credit is a fully refundable tax credit for people who lived in the US for at least half the year (and it is a non-refundable credit otherwise). (There are endless details in tax, no?). 

To take the Child and Dependent Care Tax Credit for your kid’s summer camp expenses (or regular school-year childcare), here’s what you need to know:

• The credit is based on the first $3000 of camp/care expense for your first child, or on your first $6000 for two or more children. If you spend more than that (and if you’re like me and many other working parents, you probably will), you aren’t going to get any additional benefit. This limit is a combined total – so it’s fine to add up multiple camps, or camp plus a school-year afterschool program, babysitter, or regular full- or part-time childcare.

• If your household income is less than $15,000, you qualify for the maximum credit of 35% of your expenses up to $3,000 for one dependent or $6000 for two or more, which is a $1,050 credit for one child or $2,100 for two or more.

• Taxpayers with income between $45,000 and $438,000 can get up to 20% of eligible expenses as a credit for a maximum of $600 for one child or $1,200 for tow or more.

• It is only for children under age 13, or dependents of any age who can’t care for themselves (such as an infirm/disabled parent or adult child under your care)

• Although I’m writing about this credit in the context of summer camp, you should know that all of these kinds of care qualify for the credit:

  • Day care

  • After school care

  • Babysitters (provided the babysitter isn’t your spouse or your child/stepchild or anyone that you claim as a dependent on your tax return). Note that this is only for babysitting that allows you to go to work or look for work – date night doesn’t qualify.

  • In-home assistance for a member of your family unable to care for himself, including a spouse.

These kinds of expense don’t qualify:

• Tutoring

• Private kindergarten or private grade school

• Overnight camp

And this is what you will need to get the credit:

• You need to record the name, address, and taxpayer ID number (a social security number or TIN for an individual or an employer ID number [EIN] for a business) of the care provider on your tax forms. You will need to ask the camp (or babysitter) for this info.

• You must be paying for the summer camp (or other care) so that you can work, or look for work. You also qualify for the credit if you are a full-time student for 5 months or more of the tax year. Both spouses must earn income (or be a full time student or looking for work) in order to take the credit. Unemployment income does not count as earned income for the purposes of this credit.

• If you’re married, you must file a joint tax return (unless you’re legally separated). This credit is not available for people married filing separately.

• Income under $438,000 if you are married filing jointly.

The Child and Dependent Care Tax Credit is a comprehensive and helpful tax credit. Take advantage of it. And enjoy your summer.

DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.

Bio: Hannah Cole is an artist and Enrolled Agent. She is the founder of Sunlight Tax.