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Tax Tips for Back to School


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9/4/2018
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Tax Tips for Back to School

Tax Break on Summer Camp and Day Care for Small Children

Have you been paying thousands of dollars to stow your little ones away at summer camp, so you could work during summer break?  If so, you may be in luck, and could save a few grand on your tax bill come April.

Working parents can get a credit for Child and Dependent Care.  And, this is a fairly broad deduction.  This credit includes babysitters, paid daycare, summer camp or other “child care” services.  This credit only applies to children under the age of 13 and/or children with a disability.  This credit allows you to deduct 35% of these expenses with a cap of $3,000 for one child and $6,000 for multiple children. 

According to the American Camp Association, day camps cost an average of $314 per week!  Specialty camps cost even more at $750 per week.  And, overnight camps are even pricier.  At these rates, the cost of summer camp can add up quickly.

Work-related:  To qualify for the credit both parents must be working or looking for work, and neither can be fully unemployed or a “stay-at-home” parent.  This is a tax break meant to compensate for the fact that in order to work while your kids are home for the summer, you have to find something for them to do and make sure they are cared for.  One useful loophole that applies to a lot of new parents is that if your spouse is in school full-time, you can still take the deduction, despite the fact both of you are not gainfully employed.

What is deductible:  You can deduct the costs of the camp itself, but not the gear and garb your child needs for camp.  You can deduct medical-related expenses (i.e., a physical) on your Schedule A, itemized deduction schedule as well.

Form 2441 for taking the deduction:  To claim a credit for child care expenses, you'll need to attach a federal form 2441 to a full federal form 1040. You cannot file the simplified federal forms and claim the credit.

Limitations:  There are a few limits.  The following don’t qualify: overnight camps, summer school tutoring, spousal care, or leaving the kids with granny.

Claiming the credit: You need to claim your provider and keep receipts.

Review: Deductions for Children Under the TCJA

Old Law

The Tax Cuts & Jobs Act (“TCJA”) eliminated personal exemptions.  It used to be that a taxpayer or family could claim a personal exemption for themselves and all qualifying dependents under IRC § 151.  In turn, these exemptions would historically phase-out for incomes over $313,800 for joint returns, denying the benefit to very wealthy taxpayers.  IRC § 152 went into great detail as to who was a qualifying dependent.  Now that the TCJA has eliminated personal exemptions, what do you do about getting credit for your children at tax time?

TCJA and Child Tax Credit Model

For families with children, the elimination of personal exemptions reduces the tax benefit traditionally available for families.  To make up for this, the TCJA provides an expanded Child Tax Credit and increased the incomes it applies to before the phase-out begins.  The Child Tax Credit still applies to dependent children as defined under IRC § 152.  Under 26 U.S. Code §152(d)(1)(B), a qualifying relative includes an individual “whose gross income for the calendar year in which such taxable year begins is less than the exemption amount."  The TCJA also adds a $500 nonrefundable tax credit styled as a “Credit for Other Dependents” to give small break for dependents who are not “qualifying children.”

The Child Tax Credit is $2,000 per qualifying child, which is double what was available under the old law, but it is limited to children under the age of 17.  Another change is that $1,400 of this amount is potentially refundable for poorer taxpayers who already have a refund before claiming the Child Tax Credit.

The Child Tax Credit appears on Lines 52 and 67 of the Form 1040.

As for the phase-out increases, for married taxpayers filing a joint return, the phase-out now begins at $400,000 and is $200,000 for all other taxpayers.

The High Cost of Child Care in the United States

The cost of child care has been rising precipitously at a faster rate than anywhere else in the world and has been a recurring political issue year-after-year.  The non-profit Child Care Aware of America (“CCA”) has been conducting regular surveys to measure the costs and affordability (or lack thereof) of child care across the nation.

The average U.S. family pays about $18,000 per year in child care expenses.  In the Northeast the average cost is higher at $22,415.  In the New York City metro area, the total average cost of child care is well over $30,000 per family.  In San Francisco, the average wage for a Nanny is $35,848, before factoring in other costs!  These figures do not include health care, tuition, higher education, and episodic events (braces, specialty camp for a sport, travel for a big tournament, home tutoring in a difficult area, special needs after-school programs, or prep for standardized tests like the SAT).

After healthcare, which takes up about 47% of the average family’s take home pay, a nearly 3-fold increase in just the last 10 years, basic child care expenses for families with children take up about 85% of the remainder.  Essentially, having kids in this country, and keeping the family healthy, for the handful of people in each state who can afford to do both, is going to cost almost all of your take home pay.  And that is before you figure out how to keep the kids busy while you are working in the summer and over winter break.

Child care costs run about 20% of total gross annual income nationally and in many states where costs are higher (New York, New Jersey & Connecticut) the figures can be double that amount as a proportional share. 

At the same time, there is some good news, in that these higher-cost states have some of the cheapest relative rates for hiring a Nanny nationwide, due to demand and competition.  Conversely, these states post some of the highest rates for day care, which is in high demand, but for which the supply is still dramatically lagging that demand.

63% of respondents in a Care.com survey said that child care was the biggest influencing factor in their current employment decisions.  1/3 of respondents changed jobs, sought out a flexible schedule, or switched to part-time due to the unaffordability of child care.

Dependent Care Flexible Spending Accounts

Some employers have Flexible Spending Accounts (“FSAs”) that allow you to set aside pre-tax dollars to cover child care, including day care, babysitters, nannies and day camp for dependents under age 13.  For 2018, the IRS contribution limit to FSAs is $5,000 per family for married couples.  That is not a whopping savings and the extra $1,500 of tax saved probably isn’t going to change your life.  But, for the frugal, it is another opportunity to keep more of your hard-earned cash, rather than giving it to Uncle Sam.

Caveat Parent – Don’t Risk Doing Time in the Clink for Nanny Tax Fraud

When it comes to nannies and in-home care, you cannot take a deduction if you are paying someone “off the books,” which is something you should never even consider doing.  If you try to take the deduction, but are paying under the table, you are posting a big flashing sign telling the IRS you are a “tax cheat.” 

The IRS considers this a serious criminal offense and you can be prosecuted for doing so.  Think parents aren’t prosecuted for this every day?  Think again.  https://www.cnbc.com/2017/02/02/why-paying-your-nanny-under-the-table-is-a-really-bad-idea.html  See also https://www.entrepreneur.com/article/292137 

Who is most at risk?  As part of its crackdown, the IRS is looking for people who work for law firms, in law enforcement, for government agencies, as doctors, in a CPA firm, and/or who are public figures or engaged in public service.  If you fit in these categories, the IRS is looking to make an example out of you.  They are also looking for whistleblowers to turn these people in, and there is no defense for this type of offense.

A few notable examples.  New York City Police Commissioner Bernie Kerik was convicted of “nanny tax fraud.” Kerik’s sentence?  4 years in prison and $188,000 in restitution, plus the unpaid tax bill.  South Carolina representative Mick Mulvaney also recently got caught for unpaid nanny taxes, and nearly lost a political nomination over it, and later had to pay hefty back taxes and fines.  Looking back in time a bit, Bill Clinton’s nominee for Attorney General, Zoe Baird, lost her chance at the position due “nanny tax fraud.”

https://www.nytimes.com/2009/11/06/nyregion/06kerik.html

"For me, everyone who hires a nanny has something to lose if they do not follow the law," said Stephanie Breedlove, head of Care.com HomePay, managed by Breedlove, a comprehensive household payroll service, "but those with professional licenses have extra issues as they could lose their livelihood as well as their professional license."

This is actually an area where the IRS is devoting resources to crack down.  Paying your gardener or tutor under the table?  The IRS is looking into these situations as well.  You can expect to hear horror stories in the news of friends and neighbors running afoul of these laws in the next few years as “nanny tax” enforcement becomes an increasing priority.  The widespread nature of the problem makes it a fertile area for raising tax revenues, and the IRS can audit individuals, and then go back 6 or more years to ring up a hefty tab in the tens of thousands of dollars.  If you were foolish enough to set up your home care as “off the books,” you should reverse course before you get caught.  If you get caught, the final bill could easily be 20 to 30 times the cost savings, and you risk a stint in the clink too boot.

When people are caught paying child care workers off the books, they get hit with employment withholding tax, which includes – Social Security and Medicare taxes, federal and state income taxes, and federal and state unemployment insurance taxes, and worker’s compensation – all of which are required to be paid along with wages.  The IRS may interview those who worked for you to find out how long this has been going on and charge you with interest and penalties that can increase what you even more. 

And any in-home care worker that works for you regularly (i.e., not a once-in-a-while babysitter) and who is not provided by a company or agency – is an employee.  These are Trust Fund taxes and the IRS will go after you personally for them and take aim at your personal assets.

You should be filing a Schedule H in addition to providing these employees with a W-2 and withholding all attendant taxes.

Services like Care.com HomePay allow you to set up comprehensive household payroll easily, including HR services.  They also have the ability to set up Child Dependent Care Flexible Spending Accounts, discussed later in this article.

Child Tax Credit

For each child under the age of 17 (or who meet other dependency criteria) you get a credit of $2,000 per child, of which $1,400 is refundable for those who do not owe any taxes.  The credit begins to phase-out once a married couple hits income figures of over $400,000 per year.

Tuition – Please refer to our prior article on setting up Section 529 plans under the new tax law.  http://www.fazziolaw.com/blog/unlock-colossal-savings-on-private-school-k-12-sec-529s.cfm

https://www.care.com/c/stories/2423/how-much-does-child-care-cost/

https://www.care.com/c/stories/3326/what-does-summer-camp-cost/

https://www.irs.gov/newsroom/back-to-school-tax-tips-for-students-and-parents

https://www.forbes.com/sites/kellyphillipserb/2016/06/27/12-tips-for-claiming-summer-camp-expenses-on-your-taxes/#1aee78202b71

https://www.irs.gov/newsroom/keep-in-mind-the-child-and-dependent-care-credit-this-summer

https://www.irs.gov/publications/p503

https://www.wsj.com/articles/SB122583716191498477

https://www.marketwatch.com/story/read-this-before-hiring-or-paying-a-nanny-2017-08-10

https://www.forbes.com/sites/kellyphillipserb/2017/12/21/how-will-the-expanded-child-tax-credit-look-after-tax-reform/#1c9ed6064205

#ChildDependentTaxCredit, #SummerCampDeduction, #ChildTaxCredit, #DependentCareFSA, #ChildTaxCredit, #Form2441



Category: Tax Law


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