As the warm weather hastens the end of another school year, parents are facing some big expenses. Summer camp costs about $300 per week, on average, or $2,400 for a typical eight-week session. And following the summer, parents will face average annual college tuition bills ranging from $9,139 (for state residents at public colleges) to $31,231 (private college).
But the IRS doesn't want to take away from our enjoyment of the summer weather and vacations, and it offers some credits and tax-advantaged ways to help pay for camp and college.
According to the recently released IRS Special Edition Tax Tip 2015-12 , many parents pay for camp for their children while they work or look for work. If this is the case, the costs may qualify for the Child and Dependent Care Credit. For the expenses to qualify, certain conditions must be met.
1. Care for qualifying persons. The expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify. Publication 503 , Child and Dependent Care Expenses, contains more information.
2. Work-related expenses. The expenses for care must be work-related. This means that the taxpayer must pay for the care so he or she can work or look for work. This rule also applies to the taxpayer's spouse if they file a joint return. The spouse meets this rule during any month he or she is a full-time student. The spouse also meets it if he or she is physically or mentally incapable of self-care.
3. Earned income required. The taxpayers must have earned income, such as from wages, salaries, and tips. It also includes net earnings from self-employment. A taxpayer's spouse must also have earned income if they file jointly. The spouse is treated as having earned income for any month that he or she is a full-time student or incapable of self-care. This rule also applies to the taxpayer if they file a joint return. Refer to Publication 503 for more details.
4. Joint return if married. Generally, married couples must file a joint return. A parent can still take the credit, however, if the couple is legally separated or living apart.
5. Type of care. Expenses may qualify for the credit whether the care takes place at home, at a daycare facility, or at a day camp.
6. Credit amount. The credit is worth between 20 percent and 35 percent of the allowable expenses. The percentage depends on the amount of the taxpayers' income.
7. Expense limits. The total expense that can be used in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
8. Certain care does not qualify. Expenses do not include the cost of certain types of care, including:
- Overnight camps or summer school tutoring costs.
- Care provided by a spouse or a sibling who is under age 19 at the end of the year.
- Care given by a person who the taxpayer can claim as a dependent.
Taxpayers should keep all receipts and records for when they file tax returns next year. They will need the name, address, and taxpayer identification number of the care provider. Taxpayers must report this information when they claim the credit on Form 2441 , Child and Dependent Care Expenses.
Also, special rules apply if a taxpayer gets dependent care benefits from his or her employer. See Publication 503 for more on this topic.
Remember that this credit is not just a summer tax benefit. Taxpayers may be able to claim it for qualifying care paid for at any time during the year.
529 Plan Expenses
As for college, 529 plans have become very popular. At the end of 2012, more than $166 billion were invested in the various state plans. While each state provides different tax benefits for its plan, all plans are treated the same on the federal level. Contributions are made after tax, earnings grow tax-deferred, and distributions are tax-free if used for qualifying higher education expenses.
Qualifying higher education expenses include:
- Tuition and fees as required for enrollment.
- Books, supplies, computers, and other equipment required for enrollment.
- Expenses for special-needs services needed by a special-needs beneficiary (which must be incurred in connection with enrollment or attendance at an eligible educational institution).
- Expenses for room and board, but only for students who are enrolled at least half-time.
The room and board expense qualifies only to the extent that it is not more than the greater of the following two amounts:
- The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
- The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
The taxpayer must contact the eligible educational institution for qualified room and board costs.
Distributions not used for qualifying higher education expenses are subject to tax – the previously untaxed portion of the distribution is taxed at the owner's ordinary income tax rate plus a 10 percent additional tax. The 10 percent penalty is waived if a distribution is made:
- Due to the death, impending death, or long-term disability of the account's designated beneficiary.
- After the designated beneficiary receives a tax-free scholarship or fellowship grant, veterans' educational assistance, employer-provided educational assistance, or any other nontaxable payment (other than a gift or inheritance) received as educational assistance.
- Because the designated beneficiary is attending a US military academy.
- Only because it is included in income because the qualified education expenses were taken into account in determining the American Opportunity or Lifetime Learning credits.
Both the Child and Dependent Care Credit and 529 plan rules provide an opportunity for you to speak to your clients and potentially find some opportunities for you to help them lower their tax bill – and better enjoy the summer.
Credit: Michael Sonnenblick, Thomson Reuters