Bad news, summer lovers: Fall is coming. And along with packing up the coolers and beach blankets, parents need to take stock of what they did with their kids over this summer vacation. Some of it may lead to tax savings.
“The tax breaks — the dependent care account or the child care tax credit — aren’t just for in-home care,” says Kerri Swope, vice president of Care.com HomePay, the online child care resource’s tax, human resources and payroll business. “A lot of families, if they are aware of those tax breaks, think they can only take advantage of them to help offset the costs of child care if they have a full-time nanny working in their home, but that’s not the case.”
Indeed, if your kids went to day camp for the summer, you may be able to cover the costs using funds from a dependent-care flexible spending account or apply those expenses toward the child care tax credit. The same goes for other professional child care you enlisted to help you during the long summer break.
[Read: Here’s What to Know About Filing Taxes.]
What is a dependent-care FSA? A popular employee benefit offered by 67 percent of U.S. employers, according to the Society for Human Resource Management, these accounts let you save pretax money to cover child care, including day care, babysitters, nannies and, yes, day camp, for your dependents who are younger than age 13. Unfortunately, sleep-away camps do not qualify.
For 2018, the IRS-set contribution limit for FSAs is $5,000 per family for married couples filing jointly (but your employer may decide on a minimum for its particular plan, too). That means if you’re in the 30 percent tax bracket, using that full $5,000 from your FSA can save you $1,500.
Another tax break opportunity: The child and dependent care tax credit lets you take back 20 to 35 percent, depending on your income, of up to $3,000 worth of care costs for one child or $6,000 for multiple kids. And being a credit, it reduces your tax bill dollar for dollar, unlike a deduction, which only reduces your taxable income. So if you qualify for $500 of this credit, that’s a full $500 worth of savings. You and your spouse have to work or be full-time students to claim this credit.
You don’t even have to choose between those possible breaks. You just can’t apply both savings opportunities to the same dollars. For example, you can’t claim the child care tax credit for costs you paid for using FSA funds. But if you only saved, say, $2,000 in your dependent care FSA, you can still claim the child care credit for $1,000 of additional expenses for one child. “You really can do kind of a hybrid in order to split the kids’ time between camp and … a few days a week with a nanny in order to take advantage of both of those tax credits,” Swope says.
[Read: 10 Tax Deductions That Will Disappear Next Year.]
In order to take advantage of these breaks, though, your care needs to be on the books, whether it’s at a credentialed day camp or with a summer nanny. If you’re working with an individual and pay him or her $2,100 or more in a calendar year, you’ll be responsible for covering so-called nanny taxes, including Social Security and Medicare taxes, federal and state income taxes and federal and state unemployment insurance taxes. You might think that a summertime caregiver might not fit the bill, but be sure to check your math. “Paying that caregiver on the books is really important, especially so you can claim the tax breaks that can offset a lot of that cost of care,” Swope says. “It’s really easy to hit that $2,100 threshold over the course of 12 weeks while the kids are out of school.”
Of course, there is some red tape involved with making all this official. Among other things, you have to have accurate records of payments, including information on any taxes that have been withheld, as well as necessary identification numbers, such as your nanny’s Social Security number. You must also provide your nanny with a Form W-2 by the end of January following his or her summer of employment. “At the end of the summer, it’s important that people close out with the nanny and have the proper paperwork in order and any forwarding address,” Swope says. “That’s one thing the family tends to forget.”
Also, remember that you can claim a child tax credit for every kid you have who is younger than 17 years old — just for their existence. And this deal has gotten even better for 2018, thanks to the Republican tax overhaul. The credit has doubled to $2,000 per child and allows up to $1,400 of that credit to be refundable. (Before this year, it was nonrefundable.) Deborah Meyer, financial planner and owner of financial planning firm WorthyNest in Saint Charles, Missouri, explains with this example: If you owe Uncle Sam $400 for 2018, and you have one child, earning you a $2,000 child tax credit, “your tax liability is reduced to zero, you receive a $1,000 refund, and you still have $600 of nonrefundable child tax credit to offset any 2019 tax liability,” she says.
[See: 10 Smart Ways to Spend Your Tax Refund.]
Plus, Meyer notes that more families can take advantage of the child tax credit this year because income limits have been raised. Married couples filing jointly can claim the full credit as long as their adjusted gross income falls below $400,000, up from $110,000; other filers can nab the full credit with AGIs of less than $200,000, up from $75,000 in 2017.
While you’re at it, reviewing this summer can already help you save for next summer. If your kids liked camp so much this year that they’re ready to commit to going again next year, you can score some savings. “A lot of camps offer early bird registration discounts,” says personal finance expert Cameron Huddleston, life and money columnist for GoBankingRates.com. “If you know this is what you want to do, sign your kid up early — we’re talking December — because typically you can get a discount.”
More from U.S. News
10 Offbeat Ways to Earn Extra Money
9 Habits That Can Get You Out of a Deep Debt Hole
8 Easy Ways to Organize Your Financial Life
End-of-Summer Tax Tips for Parents originally appeared on usnews.com
