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TAX TALK: Potential Tax Benefits of Summer Day Camp

Posted by Hal Zemel, CPA, J.D., LL.M. on May 23, 2016 7:00:00 AM
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Sending your kids to day camp this summer? If day camp is part of your children’s summer plans, you may be eligible for a tax credit or deductions from income.

Tax Credits v. Tax Deductions
Day camp (but not overnight camp) may be a qualified expense in determining your child and dependent care credit. The credit is equal to 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 ($600 of credit) for one qualifying child and $6,000 ($1,200 of credit) for two or more children.

While tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar, and deductions only reduce the amount of income subject to tax, it is not always better to claim a tax credit.

For example, day camp costs may also qualify as an eligible expense in your Flexible Spending Account (FSA), which will allow you to exclude up to $5,000 from your gross wages. It may be more advantageous for you to pay the costs for day camp out of your flexible spending account. If you’re in the 28% tax bracket, a $3,000 exclusion from wages will save you $840 of tax (and may have additional tax benefits by reducing your adjusted gross income), while you will only reduce your tax liability by the $600 with the dependent care credit. So it’s important to take maximum advantage of both tax credits and deductions available to you based on the type and amount of qualified expenses you have incurred during the year.

Know the Rules
A qualifying child is generally a dependent under the age of 13. (There’s no age limit if the dependent child is unable physically or mentally to care of him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care FSA in which you participate, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Are you eligible?
These are only some of the rules that apply to the child and dependent care credit and deductions. So please contact me at HZemel@berdonllp.com or your Berdon advisor to determine whether you’re eligible and which benefits are best for you.

Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

Topics: TAX TALK

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