In summertime the living may be easy. But for working parents, it's far from cheap.
Each year after school lets out, millions of children attend thousands of summer camps so their parents can have day care. The cost can easily run into the thousands of dollars.
In Southern California, for example, about 1,400 kids pour into Tom Sawyer Camps -- a Pasadena-based operation that takes children ages 4 through 13 for eight to 10 weeks. For this, parents pay $2,700 to $4,100.
On the bright side, they can offset a portion of this cost with tax breaks provided by the federal government.
"Anyone who has a child in camp so that they can be gainfully employed can claim a tax break," said Patty O'Connell of Holthouse, Carlin & Van Trigt, a Santa Monica tax firm.
There are two separate breaks for day-care expenses: One is a credit, which reduces parents' tax bills by a percentage of their day-care expenses. The other is an "income exclusion," which works like 401(k) contributions. The money is taken out before taxes are computed, which reduces taxable income and, therefore, income taxes.
Parents can't take both tax breaks for the same expenses, O'Connell cautioned. They must choose which one would work best for them.
For the child- and dependent-care credit, parents can claim as much as $3,000 a child, or $6,000 total, in day-care expenses. The amount of the credit would be 20% to 35% of those expenses, depending on the parent's taxable income.
Only those earning $15,000 or less get the full 35%. The percentage allowed goes down as income goes up. For parents with $43,000 or more in joint income, the credit is worth 20% of child-care expenses. So those with income above $43,000 and two qualifying children in day care could get a credit of as much as $1,200 -- $600 per child. That maximum amount would stay the same no matter how high their income.
And remember, a tax credit is especially handy because it is a direct reduction in taxes owed, not just an income adjustment.
For most higher-income parents, however, O'Connell recommends the income exclusion. That's because it can help taxpayers qualify for other income-tested tax breaks that they might otherwise lose, which can sharply boost the overall benefit.
The exclusion is available only for those who have so-called dependent-care accounts at work. Also known as flexible spending accounts, they allow parents to set aside as much as $5,000 that can be used to pay child-care expenses. You generally must sign up these accounts during your employer's open-enrollment period for benefits.
