The Blue Blaze

Make Fast Cash with the Dependent Care Credit

Posted by Frankie Corrado on Mar 30, 2017 4:13:46 PM

dependent-care-tax-credit.jpgDid your child attend summer camp or after school tutoring last year? You could be leaving money on the table if you aren’t utilizing the dependent care credit.

First of all, what is a tax credit?

A credit (as opposed to a deduction) is a dollar for dollar reduction of your TAX. Credits are more valuable than deductions. A deduction allows you to deduct an expense or cost from your income. Let’s say you make $100,000 a year. A common deduction is the mortgage interest deduction, which allows you to deduct the interest you pay to a bank on your mortgage. Let’s say that your mortgage interest paid was $10,000 last year. That would mean you deduct $10,000 from your income to arrive at a net taxable income of $90,000.

As a financial life guide, I support my clients in every capacity where finances and life intersect. That includes tax preparation. When I prepare my clients’ return and arrive at their net taxable income, I figure out what the tax is on that income. For a couple that is married and files jointly, the tax on $90,000 of net taxable income is $14,043.

This is where the tax credit comes in.

Let’s say you have two kids, both of whom attended a summer day camp or after school tutoring program. You have the ability to take a tax credit (which will reduce that $14,043 of tax) of up to $1,200 ($600 per child). How does an extra $1,200 sound? I think it sounds great! Lot’s of ways to pursue that ideal life with some extra cash.

So how do you get this magical credit?

Here are some simple rules:

  1. Your child must be under the age of 13 when the camp or qualifying expenses occurred. If they are older, they don’t qualify. Sorry.
  2. If you are married, both parents must have worked during the year (in reality, this credit is a way for the government to help offset some of the costs that allow you and your spouse to work).

Here's an infographic -- a quick look to see if your child care expenses qualify for the child care tax credit. INFOGRAPHIC Dependent Care Credit.jpg

Just be aware that there are certain types of dependent care expenses that this would not qualify for, like sleep away camps or schooling at the kindergarten level and above (but pre-school counts!).

How do you apply for this credit?

Call the organization who sponsored the camp and ask for their Federal Identification Number. Provide this number, the fee you paid and the name and age of your child to your accountant. He or she will calculate your savings for you. Or, if you do your taxes yourself, you want to make sure you complete Form 2441 Child and Dependent Care Expenses. Turbo Tax should take care of the rest.

So that band camp or those swimming lessons you paid for last summer could directly reduce your tax liability. If so, you keep more money in your pocket and send less to the government. Did you already file your taxes without these claims? No worries. You can file an amendment to your last return. In fact, you can go back up to three years to claim these credits. We offer a free tax return review that will help you catch missed opportunities. Sign up for one today.

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Topics: Dependent Care Credit