2 Overlooked Benefits Parents Can Use to Lower the Cost of Summer Camp

Summer may be one of childhood’s greatest joys, but for working parents, the end of the school year often means the beginning of concerns over child care costs.

Given the cost of summer enrichment these days, it’s not hard to understand why: The nonprofit American Camp Association found that summer camp providers increased their prices 35% last year amid inflation and a surge in post-pandemic demand.

This year summer camps cost an average of $70 to $120 a day, while overnight camps run $170 to $325, according to an analysis by the camp resource site Summer Camp Hub. These seasonal expenses, combined with rising annual child care costs and inflationary pressures, can create financial hardship for many families.

While child care subsidies in the United States are limited compared to other wealthy nations, there are some federal benefits that can help make child care more affordable this summer. In some cases, people with young children can get reimbursed for day camp and day care costs through an employer flexible spending account (FSA), or they can claim them for a tax break via the child and dependent care tax credit.

"Both benefits help you save on taxes for the qualified costs of child care," says Rachel Rouleau, chief compliance officer for health care advocate and retailer Health-E Commerce. "You just receive the savings differently according to which one makes more sense."

Paying for summer child care with a dependent care FSA

A dependent care FSA is specifically designed to help employees pay for work-related child and dependent care. These tax-advantaged accounts are offered through an employer and allow you to set aside pre-tax funds from your paychecks so you can request reimbursement later.

If you have to pay for summer day camp, day care or a babysitter for a child under 13, a dependent care FSA can help cover the cost. The money you contribute isn’t subject to payroll taxes, which means you'll also lower your taxable income and keep more of your paycheck, according to the IRS.

Take note that a dependent care FSA is different from a health care FSA, which works the same way but only covers eligible health care expenses for workers and their dependents.

Individuals and couples filing jointly can contribute $100 to $5,000 a year to a dependent care FSA, and a married person filing separately can contribute up to $2,500. Both you and your spouse (if you’re married) must be working or looking for a job in order for your dependent care costs to qualify. You’re also eligible if either you or your spouse attends school full-time as long as one person is working.

Taking advantage of a dependent care FSA can save families big time. For example, a family that pays 25% in combined federal and state taxes and elects the maximum contribution of $5,000 would reduce their tax bill by $1,250 for the year, Rouleau says.

The funds in dependent care FSA accounts don’t roll over if you fail to spend it all by the end of the year, which means any money remaining would be forfeited (although there can be a two-month grace period in some cases). Usually, you can’t change the election amount after open enrollment unless you experience a significant life event, like marriage or childbirth. The IRS relaxed these FSA rules in the last few years to accommodate for COVID-19, but carryover and enrollment policies for dependent care FSAs have since returned to normal.

To get reimbursed for eligible child care expenses, you submit a claim with receipts and supporting documentation through your FSA provider. The documentation needs to show your expense is eligible, so it should include service dates, the dependent’s name, the care provider’s name and address, the service provided and the amount billed.

Dependent care FSAs only cover child care as a work-related expense, so overnight camps and summer school aren’t eligible. You can find out more about the IRS’s dependent care FSA eligibility requirements here, or see how much you stand to save with this dependent care FSA calculator.

Can you use HSA money for child care or summer camp?

No, you cannot use an HSA to help with child care or summer camp costs.

Much like a health care FSA, a health savings account (HSA) only covers qualified medical expenses, like copays, certain pharmacy items and co-insurance. A dependent care FSA is the only employer benefit account that will help pay for child care while you work.

Using the CDCTC for summer camp or child care

Not all employers offer a dependent care FSA option, but the IRS says many working parents can claim the same child care expenses under the child and dependent care tax credit (CDCTC) by filing a Form 2441 with their tax return. Keep in mind that it's separate from the child tax credit, which is available to parents with children 17 and under and applies to a broader range of expenses.

Summer day camp programs, day care and home-based care, like a babysitter, for children under 13 can count toward the child and dependent care credit. This tax break is based on your annual earnings and the percentage of eligible work-related child care expenses you rack up.

Depending on your adjusted gross income (AGI), the rate for the credit ranges from 20% to 35% of your work-related child care expenses. For 2022, filers were able to claim up to $3,000 of expenses for one child and up to $6,000 for two or more.

While you must have earned income to receive the credit, the percentage of expenses covered decreases as your income increases. For instance, the maximum 35% rate applies if your AGI is $15,000 or less. If your AGI is $43,000 or more, the 20% rate applies, which means your maximum credit would be $600 for one child and $1,200 for two or more.

Those who are married and filing separately generally won’t be able to claim the child and dependent care credit. You also can’t count work-related child care expenses toward the credit if you’re already getting reimbursed through a dependent care FSA, or if state social services reimburses you for some of your child and dependent care expenses.

The CDCTC is non-refundable, so while it can reduce your tax liability, you won't get a refund if the credit is more than the taxes you owe.

For more on eligibility rules and to determine how much you can figure the credit, you can refer to the IRS Publication 503 for the relevant tax year.

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