It is quite possible you are not getting as much “value” out of your little pumpkin as you could. No, I am not suggesting sending her out to work – yet. I am talking about squeezing some extra dollars out of tax credits that are passing you by.
Most parents know that you can take a credit for childcare when you file your taxes. However, a far more lucrative option is to find out if your employer offers a pre-tax” cafeteria plan” with a dependent care option. Why? You not only get the income tax savings (potentially at a higher rate), you also save the “payroll taxes” – social security and medicare . If you do the maximum — $5,000 – that saves you close to $400. AND – your employer saves the same amount on their portion of the payroll taxes. It’s a no-brainer: if your employer does not offer this option, why not bring it to their attention?
Most parents know that you can claim pre-school/nursery school costs. Did you know that you can also claim day camp expenses – even for “specialty camps” like computer and soccer camp? After school activities such as an acting or karate qualify as well because they “enable the parent to work.” The credit expires when the child turns thirteen.
And for good old babysitting? That’s fine, just keep in mind that you must report the name and taxpayer number of the person or business you are paying. So if you are giving your neighbor’s teen fifteen dollars an hour he may not be so amenable to this idea. Professional baby sitters or nannies should be prepared to disclose this information – ask for the information when you hire them.
Does one spouse not earn income or make less than $6,000? Your deduction will be limited or non-existent. The credit presumes that if one spouse has no income then he can care for the child without any help – at least from the tax code. We all know that is not always the case – she may have started a business as self-employed and be “showing a loss” for a couple of years. But that was the presumption of the legislation.