Summer Tax Tips for You and Your Children

The summer has started and summer camp bills have been paid. Summer camp is a great way to keep our children busy and looked after while we are working. But it comes at a steep price.
Summer camp costs are, on average, about $300 per week. And for our children who are graduating from high school, we are looking at college tuition fees coming due this August ranging from an average of $9,139 (for state residents at public colleges) to $31,231 (private college). There are some tax advantaged ways, though, to help pay these expenses.

The Child and Dependent Care Credit might be useful if a parent pays for camp for his or her children while working or looking for work. As the IRS points out in its Special Edition Tax Tip 2016-10, for the expenses to qualify, certain conditions must be met:

1. Care for qualifying persons. The expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify. Publication 503, Child and Dependent Care Expenses, contains more information.

2. Work-related expenses. The expenses for care must be work-related. This means taxpayers must pay for the care so they can work or look for work. This rule also applies to the taxpayer’s spouse if they file a joint return. Spouses meet this rule during any month they are full-time students. Spouses also meet it if they are physically or mentally incapable of self-care.

3. Earned income required. The taxpayers must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. A taxpayer’s spouse must also have earned income if they file jointly. Spouses are treated as having earned income for any month they are full-time students or incapable of self-care. This rule also applies to the taxpayer if they file a joint return. Refer to Publication 503 for more details.

4. Joint return if married. Generally, married couples must file a joint return. A parent can still take the credit, however, if the parents are legally separated or living apart.

5. Type of care. Expenses may qualify for the credit whether the care takes place at home, at a daycare facility or at a day camp.

6. Credit amount. The credit is worth between 20 and 35 percent of the allowable expenses. The percentage depends on the amount of the taxpayers’ income.

7. Expense limits. The total expense that can be used in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

8. Certain care does not qualify. Expenses do not include the cost of certain types of care, including:
• Overnight camps or summer school tutoring costs.
• Care provided by a spouse or a sibling who is under age 19 at the end of the year.
• Care given by a person whom the taxpayer can claim as a dependent.

Keep records and receipts. Taxpayers should keep all receipts and records for when they file tax returns next year. Taxpayers will need the name, address and taxpayer identification number of the care provider. Taxpayers must report this information when they claim the credit on Form 2441, Child and Dependent Care Expenses.

Dependent care benefits. Special rules apply if taxpayers get dependent care benefits from their employer. See Publication 503 for more on this topic.

Remember, this credit is not just a summer tax benefit. Taxpayers may be able to claim it for qualifying care paid for at any time during the year.

529 Plans
As for college, 529 plans have become very popular. At the end of 2012, over $166 billion was invested in the various state plans. While each state provides different tax benefits for its plan, on the federal level all plans are treated the same. Contributions are made after tax, earnings grow tax-deferred, and distributions are tax free if used for qualifying higher education expenses.
Qualifying higher education expenses include:
1. Tuition and fees as required for enrollment.
2. Books, supplies, computers and other equipment required for enrollment.
3. Expenses for special needs services for a special needs beneficiary (which must be incurred in connection with enrollment or attendance at an eligible educational institution).
4. Expenses for room and board, but only for students who are enrolled at least half-time. The room and board expense qualifies only to the extent that it is not more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

The taxpayer must contact the eligible educational institution for qualified room and board costs.
But distributions not used for qualifying higher education expenses are subject to tax—the previously untaxed portion of the distribution is taxed at the owner’s ordinary income tax rate plus a 10 percent additional tax. The 10 percent penalty is waived if a distribution is made:
1. Due to the death, impending death or long-term disability of the account’s designated beneficiary.
2. After the designated beneficiary receives a tax-free scholarship or fellowship grant; veterans’ educational assistance; employer-provided educational assistance; any other nontaxable payment (other than a gift or inheritance) received as educational assistance.
3. Because the designated beneficiary is attending a U.S. military academy.
4. Only because it is included in income because the qualified education expenses were taken into account in determining the American Opportunity Tax Credit (AOTC) or lifetime learning credit.
The Child and Dependent Care Credit and 529 Plan rules are complex, and this article only provides an outline of the requirements needed to take advantage of them. Both summer camp and college are significant investments. Enjoy the summer and tax clients should speak to their accountant or lawyer to make sure they can enjoy these savings.

Originally written BY MICHAEL SONNENBLICK for

Slow and Steady – The Smart Investment Strategy

In today’s rabbit-fast world, it pays to remember that the tortoise won the race.  For investors, dollar-cost averaging – a slow and steady investment plan – can be a winning strategy.

With dollar-cost averaging, you invest a set amount of money on a regular basis, typically in a mutual fund.  The idea of investing a fixed dollar amount at regular intervals is simple, but the benefits add up.  Here are some advantages offered by dollar-cost averaging:

Lower average cost.  An investing schedule based on a fixed dollar amount lets you buy more shares when prices are low and fewer shares when prices are high.  This averaging effect can make the per-share cost of your investment lower than the average market price per share for the same time period.

Expanded investment options.  Coming up with the minimum that some mutual funds typically require to open an account can be difficult.  But many funds will waive the minimum initial investment if you sign up for an automatic monthly investment plan.

Decreased market timing risk.  Committing to a plan of dollar-cost averaging takes the guesswork out of when to invest.  Once you’ve decided how much to invest and how often, you make purchases regardless of the direction of the market.

Disciplined investment.  Fixed, automatic payments on a regular schedule provide an easy yet disciplined way to finance your investment goals.  Because the amount you invest stays constant, you can more easily budget for it.

Dollar-cost averaging is a disciplined investment strategy.  It doesn’t eliminate the need to review your investments periodically to make sure that they still meet your expectations and your risk tolerance.

Measured and consistent investing offers long-term benefits.  And, like the tortoise, your portfolio can end up the winner.