Most working parents still have to work during the summer, even when their children are out of school. Because of this, there are extra expenses for child care if you have a child 13 years of age or younger. These expenses add up, but there is now a tax credit for parents who send their children to summer day camp.

 The Internal Revenue Service recently announced that expenses for summer day camp for your child could give you tax credits on your federal tax return.

Dianne Besunder, media relations spokesperson for the IRS said, “If you pay someone to care for your child, spouse, or dependent, you can claim the Child and Dependent Care Credit on your federal income tax return.”

People who are working, or looking for work, need to have child care while they do so. Day care and summer day camp qualify for this tax credit, which can be up to 35% of your expenses, depending on your income.

There are 9 qualifying factors that allow you to claim the Child and Dependent Care Credit.

1. Care must have been given to at least one qualifying person. This would be your dependent child who is 13 years old or younger, a spouse and anyone else who is physically or mentally disabled whom you care for. You must list each person on your tax return.
2. Care must be given so you, or your spouse, can work, or look for work.
3. You, or your spouse, must have earned income from wages, salary, tips, or earnings from self-employment. If you, or your spouse, were a full-time student, or care for a disabled person, you may qualify as having earned income.
4. You may not pay your spouse or other dependent, for the care. Your child may not be 19 years old or older at the end of the year, even if they are not your dependent. The care-giver must be identified on your tax return.
5. You must file as single, married filing jointly, head of household, or qualifying widow(er) with a dependent child.
6. The qualifying person must have lived with you for at least six months out of the year. The only exceptions are birth or death of the qualifying person, or if the child is of separated or divorced parents.
7. For the 2011 tax year, you are allowed up to $3000 of your expenses for the year for one dependent and $6000 for two or more dependents.
8. The expenses must be reduced by the amount of dependent care benefits that are provided by your employer which are deducted or left out of your income.
9. If you pay someone to care for your dependent in your home, you may have to withhold social security and Medicare tax, and also pay federal unemployment tax. Publication 926, Household Employer’s Tax Guide, explains this in detail.

Use the 2441 Form, Child and Dependent Care Expenses, to figure you credits, and send it in with your tax return.

Daniel Stoica Accounting Professional

The U.S. government knows that when you are financially responsible for a child or other dependent, you may come into financial difficulties, so the IRS allows you to take a tax credit on your income taxes. It will reduce your tax debt if you qualify for the Child Tax Credit.

If you pay someone to care for your child or other dependent while you work, or look for work, you may qualify for this tax credit. The good news is, by claiming this credit, you may even qualify for a bigger tax refund.

What is the child tax credit?

The child tax credit is a tax credit that depends on the number of dependent children in your  family. The credit depends on your income level as well. 

How do I qualify for this tax credit?

To qualify for this credit, your child or dependent must be under the age of 13. You must also pay someone to care for them while you are working or looking for work, but it must not be a spouse or your own child under the age of 19 years old. This caregive must not be your own dependent. An after school program, such as Boys and Girls Club or YMCA may qualify, but you may not claim regular school expenses.

If you care for your spouse, or any dependent who can’t care for themselves, age is not important in this instance. If you care for a disabled parent or mentally or physically challenged child, they qualify for the tax credit if they lived with you for more than six months out of the year. You are allowed to claim as much as 35% of the expenses you incur to care for them, which is $3,000 for one person or $6,000 for two or more people.

If you are employed and file as single, head of household or married filing jointly, you may apply for the child tax credit. If you receive benefits for child care through your employer, these amounts will be calculated on your return.

Why wouldn’t I apply for this credit?

If you qualify for the child tax credit, there is no reason why you shouldn’t claim it. Take advantage of all of the credits and deductions you can. It will reduce your tax burden or give you a bigger refund come tax time and, frankly, with all of the work you do caring for your child or parent or other dependent, you deserve the tax break.

 Daniel Stoica Accounting Professional

More than half of the people who filed their taxes got refunds this year, a little more than usual, but the amount of those refunds has surged over the last ten years. Many Americans have overpaid on their taxes throughout the year to get a larger refund at tax time.

Last year’s refunds averaged over $3,000, and this year’s average is not far behind, according to the Internal Revenue Service. This is nearly twice as much as the $1,700 average from 1999.

Current tax data from the IRS shows the growth in refunds hasn’t been limited to any one income level. People who suffered job or investment losses during the recession overpaid inadvertently, giving them bigger refunds.  The past decade also brought short-lived tax benefits where many taxpayers may not have adjusted their withholdings. A few examples include: the American Opportunity Education Credit; the Home-Buyer Credits; and the Expanded Child Credit.

Tax professionals and other financial advisors often frown on large tax refunds because they add up to interest-free loans to the government, thereby reducing investment capital in the same amounts. Many advise that it’s better to have the money in hand every month and invest it, spend it or just let it earn interest.  To many Americans, thought, a $3,000 check looks a lot better than $3,000 coming out of their paychecks over the year.

If your refund seems too big or too small, fixing it usually means making changes to your W-4. It’s the form your employer uses to figure withholdings on your paycheck. Amending it involves three worksheets and two tables, which is sometimes overwhelming to the average person.

The W-4 can be a headache even for people familiar with the 1040. A withholding allowance isn’t the same thing as an exemption. It’s intimidating for even the most seasoned taxpayers. If you aren’t comfortable filling out your own W-4, don’t try. It’s better to hire a tax professional.

If you pay a professional to do your taxes, he or she will most likely give you free help with your W-4. Most accountants do offer it. H&R Block doesn’t charge to fill out your W-4, if you are using them to prepare your taxes. Turbotax has a W-4 feature as part of its software program. The IRS also offers a withholding calculator at the IRS website. Make sure you have your paycheck and your tax return when you have this done to avoid any complications or delays.

Daniel Stoica Accounting Professional

People often  hold on to many myths when it comes to taxes.  Below is a list of those myths and how you can save money by separating fact from fiction.

Students are exempt.
A lot people think there’s an exemption for students, but students must pay taxes on all of their income, no matter how many credits they are taking or whether they are a full-time student.

There are special credits for students, though, such as, the Lifetime Learning Credit and the new American Opportunity Credit. Distributions from a 529 Plan are tax-free, but the income is taxed.

Students who during the summer check the “exempt” box on their W-4′s, but if they didn’t have any taxable income last year and don’t expect to have any this year, then they have nothing to claim.

I can’t claim my working child as a dependent.
If you are providing more than half your child’s support, they qualify as your dependent, and you can deduct any costs you paid for that child. Support is what’s spent, not what’s earned.

You can also qualify for an exemption if your child doesn’t earn more than the value of the exemption.

A child qualifies as a full-time student if he or she is a full-time student for at least five months during the tax year.

I can sell my house tax-free because I’m over age 55
The old law was that if you were older than 55, you could eliminate as much as $125,000 in gains from taxes, but you could only do that once. The new rules are even better.

Under the current law, age doesn’t matter. If you sold property that was your principal residence for at least two out of the last five years, you can exclude as much as $250,000 in gains, and $500,000 on a joint return. You can take the gain exclusion every two years if you qualify.

I can deduct my sales taxes too
If you file a Form 1040 and itemize your deductions on Schedule A, you can claim either state and local income taxes OR state and local sales taxes, but you cannot claim both.  If you decide to claim your sales taxes, you have to make sure that you save your sales receipts throughout the year so that you can add up the total amount of sales taxes you paid. 

If you were not very good about saving all of your receipts, you can choose to claim your state and local sales taxes instead.  One other option would be to fill out the worksheet and use the general sales tax tables found in the Instructions for Schedule A (Form 1040), but you can also use the IRS Sales Tax Deduction Calculator. 

I have to file a joint return if I’m married
If you’re married, you can always file married filing separately. You will pay more in taxes by doing so, but in some situations, this can be to your advantage.

If you’re married, you can’t file as single or head of household. However, if you’re separated and you have a child there are provisions that will let you file as head of household. Speak with a tax professional to get the most accurate information.

The tax codes are complicated and can change regularly. If you aren’t sure of the new rules, again, seek the advice of a tax professional.

Daniel Stoica Accounting Professional