Don't Mess With Taxes

Last March, parents were frantically searching for day camps to enroll their kiddos once school let out for the summer.

Then COVID-19 arrived. Most camps shut down or dramatically pared back operations and parents added teacher and summer activity director to their already long list of de facto titles.

We're still not sure whether or how many summer day camps will resume this year, but things are looking better thanks to expanding coronavirus vaccinations across the country.

That means that parents might be able to once again take advantage of the child and dependent care credit in connection with certain camp costs.

And by this time next year, with COVID-19 vanquished (fingers and toes crossed!), youngsters will be looking forward to another summer of camp fun and their parents will be claiming an even bigger tax break for camp and other care costs on their 2021 tax year returns.

2020 tax credit rules: President Joe Biden today (March 11) signed into law the latest coronavirus relief measure, the American Rescue Plan. Most of the attention on the measure has been on the next round of relief payments that are part of the new law.

It also contains a variety of tax changes, including one that will help with this upcoming summer's day camp costs when parents file tax returns next year.

But that's next year. We're still trying to get through the here and now. So let's start with a look at how the child and dependent care credit applies to our 2020 tax returns.

If you paid child care costs out of your own pocket last year, be they to a summer day camp or another year-round care facility, you might be able to use those expenses to claim the child and dependent child tax credit when you file your current Form 1040.

First, the ground rules.

Your kid, either at summer day camp or at after-school care once classes are (again) in real-life session and care programs re-open, must be 12 years old or younger.

The youngster also must be your dependent.

Parents claiming the credit must work or be looking for a job. If you're married, that means both of you have to be employed or seeking work. The only exception is when one spouse is either a full-time student or is physically or mentally incapable of self-care.

Also, don't make too much money. I know, that's not really the rule. But the reality is that you won't be able to claim the maximum tax break for your child care costs if you make more than a certain amount.

For 2020 tax returns, the maximum tax credit is available if your annual income is $15,000 or less. It starts phasing out as your earnings increase. You get the minimal credit amount once your adjusted gross income (AGI) is more than $43,000.

Expenses vs. credit claims: OK, let's talk real dollars. And the conversation is in two parts.

First, there is the total of your child care expenses. The current law says up to $3,000 spent on care of one child or up to $6,000 for the care costs two or more kids counts. I'm not a parent, but my friend with children say they hit those care amounts quickly. 

The good thing is you also can aggregate the costs if you have multiple children. Say you paid $2,500 in qualified expenses for the care of your son and $3,500 for the care of your daughter. You can use the total of both to reach the $6,000 maximum to claim the credit.

But here's the rub. The actual dollar amounts spent on child care are not the same as the actual tax break.

Figuring your actual credit: Rather, the actual child care tax credit amount is a percentage of your limited costs.

And the percentage is based on your AGI mentioned a couple of paragraphs earlier. The arrow on the image below of page 1 of Form 2441, which is one of the tax documents featured on the Tax Forms Fiesta! page, shows how income affects your child care credit amount.

So you must do some math to come up with your exact tax credit amount.

The maximum credit amount is maximum of 35 percent of your total child care costs throughout the year. And that maximum is available only to parental taxpayers who are on the lower end of the earnings scale, specifically the previously mentions $15,000 or less, regardless of your filing status.

That translates to a maximum tax credit of $1,050 for care of one child or $2,100 for costs related to two or more youngsters. Here's the math:

As the allowed percentage goes down with rising earnings, the bottom line is that when you make the maximum more than $43,000 you can claim only 20 percent of your child care costs. That comes to $600 for the care of one child and $1,200 for two or more youngsters.

Credit provides direct tax savings: While $600 or even $2,100 might not seem like a lot, especially if you've also been paying child care costs year-round, it's at least some help.

And at least it is a tax credit. That's a dollar-for-dollar reduction in what you owe Uncle Sam.

Note, though, that while the child care credit amount directly reduces any tax you might owe when you file your return, it's a nonrefundable credit.

That means, for example, if you get a $2,100 child care credit and owe $1,800 at tax time, you can only zero out your tax bill. The excess $300 cannot be sent to you as a refund.

If you can claim the credit, good for you. You can find more on the child and dependent care tax credit in the instructions for Form 2441. Or, of course, from your tax software or your tax advisor.

A few more rules: Since I started off this post talking about summer day camps, let me make clear how theses work when it comes to the child care tax credit.

These camps are great for kids. They keep busy, learn new things and there's no overnight camp separation anxiety.

They're great for parents, too. The kids are supervised, the camps are typically less expensive than their sleep-away counterparts and there's no overnight camp separation anxiety.

And when it comes to tax credit costs, only the money spent on day camps count. You cannot claim the costs of longer, away from home camps for kids.

Also, be sure you have receipts. Even though you don't have to include them with your filing, if the IRS questions this (or any) claim, you need to be ready to prove it's legitimate.

2021 child care credit changes: OK, you're through with 2020 taxes (yay!). And you've found a day camp (yay!) that takes COVID-19 precautions and with which you are comfortable sending your youngsters (yay!). What will this mean to your 2021 taxes?

Any day camps these girls attend this summer likely will be much different due to the coronavirus. The costs, however, still could provide their parents with an enhanced tax break on their 2021 tax returns. (Photo by Anny Patterson via Pexels)

The previously mentioned American Rescue Plan includes enhancements to the child and dependent care tax credit that will benefit most parents.

First, the amount of eligible expenses you can use to figure the credit are more than double the current limits. They're bumped up in 2021 to $8,000 for the care of one child and $16,000 for two or more youngsters.

The percentage of AGI is still used to figure the actual credit amounts, but the new law increases the maximum credit to 50 percent of qualified expenses instead of 35 percent. That means the tax credit itself would increase for 2021 from a maximum of $1,050 for one child and $2,100 for two or more children to $4,000 and $8,000.

Credit-eligible AGI thresholds also are adjusted so that you can make more money and still claim the credit. For 2021, the full value of the credit will be available to households making up to $125,000.

Some higher earners, however, will take a hit under the new credit calculations. Once your AGI exceeds $400,000, the percentage of care costs you can claim is reduced incrementally as it is now at a lower income level. And once you make more than $440,000, you won't get any child care credit on your 2021 taxes.

For most taxpayers, however, the care credit changes are welcome.

Temporarily refundable, too: Also welcome is the change that makes claims next year of the child and dependent care credit fully refundable. That means if you have more credit than you owe in taxes, you get the excess credit as a tax refund.

However, this refundable status, as well as the other care credit tweaks, apply only to the 2021 tax year. For now.

It's no secret that Biden and most Democrats on Capitol Hill are looking to make family friendly tax changes permanent. The ol' blog will keep an eye on this effort. And when we get into 2022 and you're ready to file your 2021 tax return, I'll remind you of these changes to the child care credit.

Tumbling taxes if not tumbling camps: Check out my Tumbling Taxes post (and video!) on camps, more of which apparently will be opening this summer as COVID-19 vaccinations increase … and parents' patience runs short! 

You also might find these items of interest:

• Summer day camps offer fun for kids, tax break for parents
• Expanded tax help in covering child care costs during coronavirus closure rules
• IRS issues guidance on added flexibility for COVID-affected flexible spending accounts

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