Leverage your Child –Maximize Childcare Tax Savings AND Save Your Company Money

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 “flexible spending account” (also known as a “cafeteria plan”) with a dependent care option.  Why?  You not only get the income tax savings (potentially at a higher rate), you also avoid the “payroll taxes” – Social Security and Medicare.  If you do the maximum -- $5,000 –you save nearly $400 annually.  Add in additional income tax savings if you are in a higher bracket and your savings could easily surpass $1,000. AND your employer saves on their portion of the payroll taxes.  (In many states they will also save on worker’scompensation, which is generally tied to wages.) It’s a no-brainer:  if your employer does not offer this option, why not bring it to their attention?

The same goes for health insurance, where the savings can be gigantic.  Do you pay even part of your health insurance?  That same pre-tax plan can shelter 25-50% of your costs and over 7% of your employer’s.

Most parents know that you can claim pre-school/nursery school costs as part of the childcare credit.  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.”  (So if you are taking the tennis lessons with them or sitting watching the class, the credit may not be valid!). 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.

Please feel free to contact me should you have any questions.

NOTE: Every situation is different and federal and state tax laws are subject to change.  This article is presented exclusively for informational purposes and is not intended to substitute for obtaining tax or financial advice from a tax or other business professional.

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Rich Streitfeld is a CPA with Aaronson Lavoie Streitfeld Diaz and Co. in Cranston, R.I.  He can be reached at rich@alscpa.com or 401-223-0205.  Rich has been called a "Zen Mensch Accountant." Ask him why.

This article originally appeared in Rich's blog  “Peace Love and Business Planning – Prosperity for the Rest of Us.” –www.peaceloveandbusinessplanning.com.