Can You Deduct Summer Camps or Daycare?

Full-time childcare is expensive, and it is not equally accessible to all. Low-income families report that childcare costs can consume up to a third of their monthly income, making it a difficult expense to budget for under even the best circumstances. Fortunately, the IRS has tax breaks that can help families better manage these costs.

Is Daycare Tax Deductible? Is Summer Camp Tax Deductible?

No, daycare and other childcare costs aren’t tax deductible for the average family. But if families have childcare costs, they may be eligible for the child and dependent care tax credit (CDCTC), instead.

What is the Child and Dependent Care Tax Credit?

The CDCTC is sometimes referred to as the “daycare tax credit” or the “child care credit” because it is a tax credit for childcare expenses. It helps parents cover the cost of care for children under age 13 and certain older dependents. It’s available to families who use childcare to enable them to go to work, search for a job, or attend school. And yes, summer daycare and summer camps count!

How to calculate the CDCTC

The credit is a percentage of work-related childcare expenses. In 2020, the nonrefundable credit was:

• Between 20% and 35% of up to $3,000 of qualifying expenses for one dependent (max credit of $1,050)
• Between 20% and 35% of up to $6,000 of qualifying expenses for two or more dependents (max credit of $2,100)

But in 2021, Congress changed the credit calculation, boosting it for low- and mid-income taxpayers. For one year only, the credit is:

• Between 0% and 50% of up to $8,000 of qualifying expenses for one dependent (max credit of $4,000)
• Between 0% and 50% of up to $16,000 of qualifying expenses for two or more dependents (max credit of $8,000)

How to Qualify for the CDCTC:

Congress also made the 2021 credit fully refundable. Here’s how you can qualify.

You pay for someone to care for your child or dependent.

The caregiver can’t be your spouse, the child’s other parent (like an ex-spouse), another one of your children aged 18 or younger, or one of your dependents (like an adult child who you still support). But most daycare providers, babysitters, nannies, and even summer camps can qualify.

Your income is below the income threshold.

In 2021, if you earn less than $125K, you can take the full 50% credit. As your income rises, that credit percentage will decrease, and the credit will be fully phased out once your income reaches $483K.

Your dependent is considered a qualifying person.

A qualifying person must have lived with you for more than half of the year and can be either (1) your dependent child who was under age 13 when you paid those caregiver expenses, or (2) your spouse or other dependent age 13 or older if they are incapable of caring for themselves.

Your childcare expenses can’t exceed your earned income.

Only the expenses up to your earned income will count toward the credit.

You aren’t eligible for the credit if you file a separate return from your spouse.

Married taxpayers who file separately can’t take the CDCTC, but all other filers are eligible.

Low-income taxpayers will benefit the most from the boosted credit in 2021 for two reasons: (1) most will be eligible for a larger credit compared to the 2020 credit, and (2) they can take the credit even if they have no tax liability. But high-income taxpayers are actually worse off. The 2021 credit phases out completely for those earning above $483K, whereas the 2020 credit never phases out, even for those with very high incomes.

The boosted benefits of the CDCTC expire in 2021. In 2022, the credit calculation will revert to how it was calculated in 2020.

What is the Child Tax Credit?

The child tax credit (CTC) doesn’t directly help families afford childcare, but it indirectly supports taxpayers with children. It works a bit like a child allowance, giving low-income taxpayers money for simply having dependent children.

Much like the CDCTC, Congress temporarily boosted the CTC in 2021. In 2022, the CTC will revert to the 2020 rules. Let’s discuss both versions of the credit.

In 2020, the CTC awarded families $2,000 per child under age 17, $1,400 of which was refundable. Taxpayers could claim the full credit if their income was below $200,000 as a single filer, or below $400,000 as a joint filer.

In 2021, Congress boosted the CTC. Instead of $2,000 per child, the credit awards between $3,000 and $3,600 per child. The first $2,000 of the credit has the same income threshold as the 2020 credit (200,000 for single filers and $400,000 for joint filers), but the additional $1,000 to $1,600 credit is phased out more quickly ($75,000 for single filers and $150,000 for joint filers). Congress also made the following changes to the CTC in 2021:

• They made the credit fully refundable.
• They expanded the credit to include 17-year-olds.
• They allowed taxpayers to take monthly advance payments of the credit in 2021.

Can you claim both the CTC and the CBCTC?

Yes; you may claim the CTC/additional child tax credit /refundable child tax credit /nonrefundable child tax credit or credit for other dependents as well as the child and dependent care credit on your return, if you qualify for those credits.

Future of Child Care Credits

Both the CDCTC and the CTC can make it easier for taxpayers to afford childcare. There has been discussion of permanently expanding both credits beginning in 2022, but the legislation introduced in Congress hasn’t had enough traction. As you file your 2021 tax returns, talk to your tax advisor to see how you can take advantage of the expanded credits while you still can.