A quick world on tax credits. They are the proverbial golden egg for taxpayers, yet most people do not realize as much. If you have the choice of claiming a tax deduction or tax credit, always go with the tax credit. Why? It will save you more money.
Why is the tax credit so powerful? The answer is simple. A tax credit is a dollar for dollar reduction from the actual amount of tax you owe the IRS. You deduct it from the final tax amount you would normally write a check for to the IRS.
At this point, you are probably wondering how this relates to summer camp fun for the kids. Well, most working parents send kids to summer camps. If you child is under 13, you are in for some excellent tax news.
The cost of day camp can count as an expense towards the child and dependent care credit. If your childcare provider is a sitter at your home or a daycare facility outside the home, you can claim a partial credit. Expenses for overnight camps do not qualify.
Now we get into the math. If you have one kid, the tax credit is capped at three grand. A couple kids or more come with a cap of six grand. The exact amount is calculated using a sliding percentage based on your income.
To make things confusing, the IRS applies a sliding annual income scale. If you make $43,000 or more, you can claim 20 percent of your cost as the credit. The percentage goes up one percent for every $1,000 less you earn.
To determine your exact percentage, you should look at the exact sliding scale the IRS publishes. It can be found in publication 503. You can order this or just pull it off the site the agency maintains.
Tax issues are not always the most exciting subjects until you need to fill out those tax forms. Whenever possible, look for tax credits you can claim and save some money. They add up quickly and can greatly reduce your tax bill.
