What are deductible expenses? Do you know what kind of expenses are tax deductible for businesses such as child care providers?
With school out for the summer, working parents will not only need to arrange care for their children while at work, but how to do so in a cost effective way. For parents facing a summer season that requires juggling childcare and work (or finding work), the IRS provides a few tax breaks that can help make this balancing act a little less painful to the pocket. From the cost of day camp to summer school, how do you determine what kind of childcare payment is a deductible expense and what is not?
The child and dependent care credit is a popular credit that, in part, enables you and your spouse (if married) to reduce your taxes by the cost of certain qualifying expenses you incur to have someone care for your child or children who are under age 13 so that you can work or look for work.
While the credit applies to a wide range of childcare services, there are a variety of popular childcare services that do not qualify. Not only are there limits on the types of care and services that qualify, but the credit is also subject to income and percentage limitations as well.
You and your spouse (if married) must have earned income from wages, salaries, tips, other taxable compensation, or net earnings from self-employment for the year; The deductible expenses must be made for children age 13 or younger; The expenses must have been incurred to enable you and your spouse to work or look for work (unless you or your spouse is a full-time student or incapacitated); The care payments must be made to someone you and your spouse cannot claim as a dependent; and: Your child must have lived with you for more than half of the year.
To qualify for the credit, deductible expenses must be incurred for the "care" of your child. With the dollar and percentage limitations, the child and dependent care credit will likely not pay for all of the expenses you incur to have someone care for your child (or children) when you're at work, or looking for work this summer. The IRS considers expenses are "for care" if their main purpose is the individual's well-being and protection.
Expenses that do not qualify for the child and dependent care credit:
Kindergarten (the IRS considers both full-time and part-time kindergarten a non-qualifying educational expense); Overnight camp; Summer school; Tutoring programs; and Private school.
Expenses that qualify for the child and dependent care credit:
Day camps or similar programs (even if the camp specializes in a particular activity, such as reading, writing, tennis, or computer skills); Nursery school, pre-school, or similar programs for children below the kindergarten level; Expenses for before- or after-school care of a child in kindergarten or higher may be expenses for care; Fees you paid to an agency to obtain services of a care provider; and Indirect expenses, such as application fees, agency or pre-school deposits, that you paid for purposes of obtaining child care.
Instead of taking the child care credit, consider taking advantage of a flexible spending account that covers dependent care expenses. Employers who allow medical flexible spending accounts usually have one for dependent care as well.
Contributions are pre-tax and, unlike the child and dependent care credit, they are not limited by adjusted gross income. If you take the credit, however, you can't double dip and pay for the expenses through a flexible spending account.
Some employers go one step better for their employees than sponsoring a dependent care flexible spending account: they provide on-the-premises day care facilities. If set up properly, it can be a win-win for employers and employees.
If you have questions on the type of child care that qualifies for the child and dependent care credit, a flexible spending account or other tax benefit, please contact my office.
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