The Child and Dependent Care Benefit may be one of the most valuable ones in the Tax Code. Generally, families can claim the CDCB even if they take a standard deduction. Furthermore, at up to 35 percent of qualifying expenses, the credit is rather large. If the children go to school during the year, summertime expenses alone may be enough to at least claim part of this deduction.
Additionally, the tax rules are much different for children than they are for adults. The IRS assumes that children do not earn very much and have almost no expenses. Whether that’s true for a given family or not, the family still reaps the tax benefits of this presumption. So, proper planning in the summer makes spring filing season a lot easier.
Summertime Child Care
If both spouses either work or are looking for work, the household can claim the CDCB in the spring. Any childcare costs are usually qualifying expenses. That includes things like babysitters and run-of-the-mill daycare centers, as well as day camps. Overnight camps, however, usually do not qualify.
What if your client is a teacher or another person with a full-time job but substantial time off during the summer? Is summertime day care still in the same category? These costs are in a grey area, but they probably still qualify as CDCB expenses.
Minor Employment Issues
There is a significant difference between employees and independent contractors. Even if the child gets a regular paycheck, s/he may still be an independent contractor. Regular employees usually do not need to worry about income taxes unless they earn more than $6,350. However, self-employed minors must pay the self-employment tax if they earn more than $400.
Family businesses work differently. Child dependent employees need not pay taxes on any earnings which do not exceed the standard deduction ($12,200). Furthermore, parents who own their own businesses can deduct the child’s wages. Additionally, sole proprietorships normally do not have to pay Medicare or Social Security taxes.
Summertime and the Family’s Home
If the client’s child is away from home for several weeks during the summer, the parents may rent out the extra space, especially if the child lives in the parent’s basement or mother-in-law house. Generally, if the third-party rental is under fifteen days, the owner need not pay taxes on the income. Additionally, the owner can deduct the rental expenses. That includes not only a pro-rata share of mortgage and utilities, but also ancillary costs, like advertising.
Furthermore, people who make energy efficiency upgrades may be eligible for the Residential Energy-Efficient Property Tax Credit. The deduction could be up to 30 percent of the cost. The residence must be owner-occupied.
Finally, summertime is often storm season. If the client’s home was in a federally declared disaster area, as opposed to a state declared disaster area, certain benefits, such as filing extensions, may be available.
Connect with a certified tax coach near you to learn more summertime tax planning tips.