When school lets out for the summer parents who work need to scramble to find child care options, which can be expensive. But the cost of summer camp and other child care expenses may qualify for some valuable tax breaks that can help stretch your dollars.
If you pay for summer camp while you and your spouse work — or look for work — the cost may count toward the child and dependent care tax credit or be eligible for tax-free withdrawals from a dependent care flexible spending account.
Here’s what you need to do to qualify and how to figure out which option is better for you.
Is Summer Camp Tax Deductible?
If you have children under the age of 13 and you and your spouse both work, the cost of summer day camp may qualify you for the child and dependent care tax credit, which can be even more valuable than a tax deduction.
[Read: What Is the Child Tax Credit?]
Eligible expenses also include the cost of day care, a nanny or babysitter and other child care costs while you and your spouse work or look for work.
“Nursery school, preschool or similar programs below the level of kindergarten count,” Michelle Morris, certified financial planner with BRIO Financial Planning in Quincy, Massachusetts, says.
Even though the cost of school isn’t eligible for this break when your child starts kindergarten, you can still count other child care costs.
“People tend to overlook that not just all-day care programs can qualify, but also before- and after-school programs can qualify, too,” Mark Luscombe, principal federal tax analyst with Wolters Kluwer Tax & Accounting, says.
Summer camp can qualify for the credit if you send your child to day camp while you and your spouse work.
“Even a day camp with a specialized focus, such as a golf camp or a swimming camp, can qualify as long as the focus is not education,” Luscombe says.
Overnight camp, however, is not eligible. Also, programs that are primarily for education, such as summer school and tutoring, don’t qualify.
How Much Is the Tax Credit Worth?
The credit is worth 20% to 35% of up to $3,000 in eligible child care costs for one child or up to $6,000 for two or more children.
The lower your income, the larger the credit. It’s worth 20% of your eligible expenses if your adjusted gross income is more than $43,000 (whether you’re single, married or filing as head of household) but there is no maximum income cutoff.
A tax credit reduces your tax liability dollar for dollar, so at the highest income level the credit can still lower your tax bill by $600 for one child or $1,200 for two or more children.
The expenses generally must be for care before your child turns 13 but you may be able to count care costs for dependent children over 13 who are disabled.
To claim the credit, file Form 2441 with your income tax return. You need to include the Social Security number or tax ID number of the child care provider or program.
For more information, see IRS Publication 503 Child and Dependent Care Expenses.
[Read: Choosing a Summer Camp for Your K-8 Child.]
Does Summer Camp Count for FSA Dependent Care?
Yes, summer camp counts for FSA dependent care, and if you have an account at work that might be an even better way to use tax-advantaged money for the expense.
If your employer offers this account, you can set aside up to $5,000 per year from your income pretax to the FSA, which you can withdraw tax free for eligible child care expenses.
The requirements are the same as for the child care tax credit: The expenses must be for child care for children under 13 while you and your spouse work or look for work. Similar to the tax credit, the cost of summer day camp can count but overnight camp cannot.
You can generally contribute up to $5,000 per year per household, even if you and your spouse both work for employers who offer dependent care FSAs.
Some employers reduce the maximum FSA contribution for highly compensated employees, Luscombe says. “Employers are not required to offer the maximum $5,000 — they may offer less or not have a dependent care FSA at all,” he adds.
Since the contributions are pretax and reduce your taxable income, the benefit is larger if you’re in a higher tax bracket. Your contributions also escape FICA taxes in addition to federal income taxes.
“In most states, they also avoid state income taxes,” Luscombe says.
[READ: What Is a Dependent Care FSA?]
Dependent Care Logistics Are More Complicated
The logistics of dependent care FSAs are a bit more complicated than they are for the tax credit. With the tax credit, you just need to report the Social Security number or tax ID number of the care provider and keep receipts from the eligible expenses in your tax records. To withdraw money from your dependent care FSA, however, you need to submit the expenses for reimbursement from your plan administrator.
In addition, you can’t withdraw FSA money until your child has received the care.
“You cannot claim it ahead of time,” according to Stephen Durso, director of client services, benefits accounts for WTW, an employee benefits consulting firm. That means if you pay a deposit for camp ahead of time, you can’t withdraw the money for those expenses until the camp starts.
Also, unlike a health care FSA, which lets you use the full year’s contributions before you actually make them from your paychecks, a dependent care FSA enables you to use the money only after you’ve contributed it to your account.
“As the money comes out of your paycheck during the year, the additional reimbursements can be made to you,” Durso says. You’ll eventually be able to withdraw the money for all your eligible expenses, but your withdrawals may be spread over a few months.
Dependent Care FSA vs. Child Care Tax Credit
You can’t double dip on tax breaks, so run the numbers both ways before deciding which one to use. Keep in mind that if you already have made contributions to the dependent care FSA, you must use that money by the end of the year or else you’ll lose it.
“The main drawback of the FSA is it’s ‘use it or lose it.’ You typically have to make your choice during open enrollment at the end of the year for the following year. If later your child care plans change and you don’t end up using it, you lose the money,'” Morris says. “Most plans will allow you to change your contributions during the year but there is still some risk.”
Since the dependent care FSA reduces your taxable income, its tax benefits rise at higher income levels. “Generally the higher your income (marginal tax bracket), the better the FSA comes out,” Morris says.
If you have just one child under 13, more of your child care costs will be eligible for the dependent care FSA than they will for the child and dependent care tax credit — the maximum dependent care FSA contribution is $5,000 no matter how many children you have but you can count only up to $3,000 in child care costs toward the tax credit if you have just one eligible child.
“In the case of one child, you get to use $5,000 of expenses for an FSA but only $3,000 for the credit,” Morris says.
If you have two or more children, you may be able to max out the dependent care FSA and also benefit from a small tax credit. That’s because the maximum FSA contribution is $5,000, but up to $6,000 in child care costs are eligible for the tax credit.
Even though the amount you contributed to the FSA reduces the expenses that are eligible for the credit, you can max out the dependent care FSA and also take the tax credit for up to $1,000 in child care costs, which can reduce your tax liability by $200 to $350, depending on your income level.
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Is Summer Camp Tax Deductible? originally appeared on usnews.com
