November 2024
Did you know that most families can get back some of the money we spend on camp each year? It’s all thanks to the Magical World of Tax Law.
If those words send a chill down your spine, fear not! William VanHook, a CPA with Horizon Tax Advisors in Cary, kindly offered to be our guide. He told us how, with a little advance planning and good documentation, families can save money with dependent care benefits.
VanHook says, “As you come up on open enrollment season, make sure you have a good tax or financial advisor, because they can advise you on how to best take advantage of what you can do with an FSA and save on taxes. Childcare is expensive, and money is a non-renewable resource!”
With his expert help, we pulled together a quick rundown to help you understand the options and maximize your savings.
But first, the requisite caveats:
- Dependent care benefits are broader than just kids. They can also apply to adults who meet certain criteria, but since this is a camp blog, we’ll focus on the rules around kids and childcare, with a focus on camp.
- This blog is not your accountant! A professional tax advisor is the best person to provide advice tailored to your situation.
Three options for saving $$
1. The FSA
A flexible spending account (FSA) lets you use pre-tax dollars to pay for dependent care expenses. The only way to get one is through your employer; if your employer doesn’t offer an FSA, proceed to option #2.
The benefit
An FSA reduces your taxable income, because money that goes into the account is not “seen” as income for tax purposes. This invisibility spell makes it most beneficial for families in higher tax brackets.
How it works
You must decide during open enrollment how much money to funnel from your paycheck into the FSA during the coming year. That amount is then broken down into payments that are deducted from each paycheck throughout the year and added to your FSA. When you pay for summer camps or other qualifying dependent care expenses during that year, you can file a claim and get reimbursed for those expenses from your FSA.
The max amount you can put into an FSA is $5,000 for single filers or married filing jointly, or $2,500 for married filing separately. The exact amount of money an FSA will save you depends on your tax bracket and some other factors. Just to throw out some ballpark examples, if you put $5,000 in your FSA for the year, you could expect to save around $1,750 if you’re in the 35% tax bracket or $1,100 if you’re in the 22% tax bracket.
The downside
Once the money goes in, it can only come out for qualifying dependent care expenses, and it doesn’t roll over year to year. So, if you have sad, lonely money left unclaimed in your FSA at the end of the year, that money slips away from your grasp forever. However, there is a grace period that allows you to submit claims for care provided from January 1-March 15 of the following year, so if you can take advantage of track-out or teacher workday camps during those months, you can still give those leftover FSA funds a new lease on life—in your wallet!
The bottom line is that an FSA can be a great way to save money, but it’s worth thinking carefully about what to put in your FSA during open enrollment each year. “Because an FSA is use-it-or-lose-it, we recommend doing a look back and seeing what you’ve spent in the past year or two in order to help forecast what you may need and maximize your benefit without losing the money,” VanHook notes.
2. The tax credit
The dependent care tax credit can save you money by reducing the amount of taxes you owe. If you don’t have access to an FSA, you definitely want to see if you can qualify for a tax credit.
The benefit
A portion of the money you spend on qualifying dependent care expenses can be deducted from the total amount of taxes you owe for that year. Owing less is essentially saving more. Yay money!
How it works
When you file your taxes, you can report what you spent that year on dependent care. If your family and the expenses qualify, you’ll owe less in taxes.
The max amount of care expenses you can claim for the tax credit is $3,000 for one child or $6,000 for two or more. (And unlike that last cookie left on the plate, this amount doesn’t have to be evenly split among your kids.) The tax credit ranges from 20-35% of the qualifying expenses, depending on your income. People with lower incomes get higher deductions. If you’re in the lowest tax bracket and claim the max amount of expenses, your tax credit would be $1,050 for one child or $2,100 for two. If you’re in the highest tax bracket, your tax credit maxes out at $600 for one child or $1,200 for two.
The downside
Whether you can take advantage of the dependent care tax credit depends on your tax burden, employment status, and other factors, so not every family can benefit. For example, if you don’t owe any taxes, you can’t benefit from the credit. Also, you must work or attend school full-time for at least 5 months of the year to qualify. If you’re married filing jointly, this rule applies to both spouses, so if you’ve got a stay-at-home parent in your family, no tax credit. Sigh.
3. The combo deal
You can actually take advantage of both an FSA and the tax credit in the same year. But, no double-dipping! Uncle Sam is smarter than that. You can’t claim the same expense for the FSA and the tax credit, and any amount that is reimbursed through your FSA is subtracted from the total amount you can claim for the tax credit.
The combo deal can help you eke out every last cent of savings, especially if you didn’t put enough into your FSA. But the optimal balance will depend on how much you spend on childcare, your income/tax bracket, and other particulars.
Things to know
There are a zillion caveats within all of this, but these are the three biggies when it comes to camp.
This only applies to expenses for kids under age 13.
On your child’s 13th birthday, dependent care benefits go poof and you can’t claim any expenses for them on your FSA or taxes for the rest of the year. Plus, you now have a teenager! Double yay!
Camps, daycares, and afterschool programs count, but extracurriculars like music lessons and sports programs don’t.
Dependent care benefits are meant to help offset the cost of care parents need in order to work or go to school, not to help with all the numerous (numerous!) expenses of raising a child. Those extra enrichment programs are great, but you can’t claim dependent care benefits for them.
Day camps count, but overnight camps don’t.
This is annoying, because clearly overnight camps provide coverage during the day, which allows parents to work just like day camps do. But when has tax law ever cared about being annoying?
Getting your documents in order
Whether you’re making a claim on your FSA or filing for the tax credit, you’re going to need to prove your expenses qualify. “Make sure you have the proper documentation so that your tax preparer or FSA provider is able to substantiate the expenses,” says VanHook. “You really need to have the paperwork in place to take advantage of either scenario.”
Here’s what to have on hand. And trust us when we say that it’s WAY easier to collect this info throughout the year as you make purchases, rather than scrambling to assemble it all at the end. (Have we personally engaged in frantic phone-calling sprees begging camp directors for their EINs in April? We can neither confirm nor deny.)
To claim a dependent care tax credit
You’ll need to provide receipts or statements showing the services provided, dates attended, and cost of care. You’ll also need the name, address, and Employer Identification Number (EIN) or social security number of each care provider. Take your time and do this right: there are no second chances to provide this information. Uncle Sam is like that sometimes.
To submit a claim with your FSA
You’ll need to submit a claim form AND provide itemized receipts for all qualifying expenses. Credit card receipts or canceled checks aren’t sufficient. The claim form will ask you to list services provided, the name of the dependent, dates attended, cost of care, and the name, address, and EIN or social security number of the care provider. If your claim is rejected, you can re-submit it with additional documentation. Just be sure to cross your fingers AND toes this time around.
Tell us what else vexes you
We hope this journey through the Magical World of Tax Law has helped turn your deer-in-the-headlights eyes (😬) into cha-ching money-saving eyes (🤑) around using dependent care benefits to offset some of your camp costs. What else can we help clarify for you with help from awesome experts like William VanHook, CPA, our expert guide for this blog, or Robert Lubeznik-Warner, PhD, who told us all about the Science of Summer Camp? Share your suggestions in the comments!
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