Speaker 1: 0:00

This is the Empowering Healthy Business Podcast, and I'm your host, cal Wilder. Each episode, we'll dive into topics important to folks who want to run businesses that are both nicely profitable, sustainable and scalable, and who want to achieve balance in their lives and realize their potential inside and outside of work. This show is sponsored by SmartBooks, provider of bookkeeping and accounting for businesses. Let's get started. Hey, greg, welcome back to the show. Thanks for having me again. So what are we talking about?

Speaker 2: 0:32

today. So it's summertime and everyone's kids are in camps, and I figured it'd be a good opportunity to talk about the child tax credit and the child and dependent care credits.

Speaker 1: 0:47

So how to deduct our kids' summer expenses on our tax return.

Speaker 2: 0:53

Yep, and I know from personal experience that it is very expensive, so we'll take all that we can get Absolutely so what's the high-level concept here?

Speaker 2: 1:06

Yeah, so there's two kind of credits here. So you have the child tax credit and then you have the child independent care credits, right, and the child tax credit is up to $2,000 per qualifying child. So typically you know your child under the age of 17, um, to help reduce your, your tax bill. And then you have the child independent care credit and this is for what I think most people think about. Um, you know, like, uh, kindergarten or or not kindergarten, preschool, daycare, stuff like that. And what people don't realize is that there's opportunities in that child independent care credit that you don't always think of. So hopefully, bring that to light. And with the passage of the big beautiful bill act, um, those have been adjusted slightly, uh, for taxpayers. So there is some change there this year for for people.

Speaker 1: 2:17

So what's the top level concept? If you're paying for somebody to take care of your kids so you can work, Is that tax deductible?

Speaker 2: 2:26

the general theory as long as you are working or you are looking for work, you and your spouse then you can deduct up to $3,000 for one child or $6,000 for two or more children, and then that is subject to a percentage, so I believe it's like 20% of your of that amount and then you get that as a tax credit. And let's keep in mind that a tax credit is a dollar for dollar reduction of your tax bill right, that a tax credit is a dollar for dollar reduction of your tax bill right, as opposed to a deduction which is taking off your taxable income. So we always want credits.

Speaker 1: 3:27

Okay, so let's say I make $100,000 salary, run my own small business and in the summertime my kid's out of school and I spend $5,000 on an afternoon soccer camp where we drop the kid off for a few hours, my wife and I. Then I go work and then I sometimes go pick up my kid at the end of the afternoon.

Speaker 2: 3:44

Yep. So at tax time you'll call up the organization. This is usually a pretty standard ask for for them and they most organizations like the Y will print out a form for you that has, like, the name, address, ein number and how much you spent on whatever like care program it was. So if you do a summer soccer camp, you know it would be, you know the $5,000 that you spent on that and that's your burden of proof, right? You hold on to that. You give that to your tax accountant and then they will plug that into the child and dependent care credit. Now, keep in mind, the child and dependent care credit is for children up to the age of 13 or for dependents who cannot take care of themselves either because of, like, a physical or mental limitation.

Speaker 1: 4:43

Okay, okay. So my example is good until they hit to be a 14. Until there and then they're supposed to take care of themselves in the afternoons, I guess.

Speaker 2: 4:54

And then they're on their own.

Speaker 1: 4:55

Yep, okay, all right. Now that seems kind of like a gray area, like there must be some rules of thumb, like if it's a four-hour camp versus a a one hour activity. Where is it Like? What are the as long as to?

Speaker 2: 5:13

be aware of, as long as you're putting them in that um program so that you can go work Um. So if, uh, obviously, if you're putting them in a program at uh, well, I don't I, I, even if maybe you're working at night and you got to put them in a program at uh, well, I don't I, I, even if maybe you're working at night and you got to put them in like a, you know, nighttime basketball league or something Um, as long as it's for you and your spouse to go work Um. I think the nighttime situation might be a little bit harder to justify if one spouse is home, but, um, you know, during the day you get summer camps. I know that for us. You know my daughter does, does chair, and so that costs us. You know it's not a huge expense, but like 300 bucks a year. She's at after school, you know, every, every day for that Um. So that is an expense that we can take.

Speaker 2: 6:10

Now a lot of people will try to sneak by um like private school Um. So, like, if you pay for kindergarten um I know I mentioned kindergarten earlier, but kindergarten is a is where it stops Um, so you can have um like preschool daycare um before and after school programs. I know a lot of schools will offer like a, a before school program that you usually have to pay for. So you know, um, so that people can get to work. I know my daughter's school starts at uh, school drop-off is like nine, 15. So you know, most people are already through a couple of meetings by then. Um. And then, uh, you know, overnight camps those, those are eligible day camps, um. So summertime is usually a big time where you know I'll be talking to clients in April and be like, oh, did your, you know, to camp this summer? Oh, yeah, and all of a sudden it's like yeah that was so expensive.

Speaker 2: 7:13

Well, that's actually a deduction.

Speaker 1: 7:17

Okay, all right, so care for the kids so you can work is deductible, and is that on top? And you said there's a limit to that right? And is that on top?

Speaker 2: 7:29

And you said there's a limit to that, right yeah.

Speaker 1: 7:38

So it's up to $3,000 for one child or $6,000 for two or more so if you have six kids, you're still limited to $6,000. If you have six kids, then good luck.

Speaker 2: 7:55

You got bigger problems to fry. Okay, yeah, um, if you have six kids, the chances are you've got at least one or two that can hopefully take care of the help out. Take taking care of the others. Um, now you can also. This also applies to, like, nannies, um, that's a little bit of a gray area Technically. If you pay someone I don't know the exact limit, but I think it's over $2,000 or so a year you really should be putting them on payroll. It becomes very frustrating and not many people do it unless they have a full-time nanny in their house but that those are the rules, um, and then you would have taxes withheld. Um, you know they'd pay federal and state um payroll taxes and then you could take um, and then you could take whatever you pay them as a tax credit. I would say that if you're paying the high school student a couple times a month to watch your kids, so you can go out on a date that does not qualify.

Speaker 1: 9:07

Okay, I have to be legitimately working, got it yes, yes, okay, um, um, yeah, um.

Speaker 2: 9:18

And then obviously the other one is the, the child tax credit, which um is pretty self-explanatory. That does um. I believe that one phases out over if you make married filing joint, you're making over 400 000, or um single, you're over 200 000 in agi. So most people get that um, it's kind of a no-brainer. It is a little bit of a shock to people when they lose it, though I had a couple of clients this year who got an unsuspecting tax bill and that was the reason.

Speaker 1: 9:59

So you know I moved to a town. Partly the reason I moved here was because the public school district was solid and one of my kids to get a good education, like every parent does. But when it comes to you mentioned, you know private school bills and potentially college bills. In what scenarios are, you know, private elementary and high school or college bills deductible, if at all?

Speaker 2: 10:28

They are never going to be deductible, but um a few years ago the 529 plans were opened up to include not just um colleges, but um also um, um private schools. So you can use private high schools yeah, you can use a 529 plan for um in that instance, or at least I know that's true in massachusetts. I know 529 plans are state by state, so you may want to double check that.

Speaker 1: 11:01

But you really want to open those things like right away, when the kid's born, or maybe even before the kid's born, right?

Speaker 2: 11:08

yeah, I mean if you do it when they're, you know, in sixth grade and you know you're contributing to a 529, and then you're pulling it out a year later, it's, it's really not going to do much for you, but um yeah, you're taking a lot of market risk and anything can happen in a few years time in the market.

Speaker 1: 11:23

So yeah, if you're a business owner.

Speaker 2: 11:26

529 may may not be the most advantageous way to go. We can get into paying your kids and putting it into a Roth and then having that build over time tax-free. So there's other ways to move the money around to be a little bit more advantageous for your kids, contagious for your, for your kids, um. But if you know 529 plan is is in your future, then that's something that you definitely want to start earlier.

Speaker 1: 11:57

Cool. Has anything really changed significantly with the one big, beautiful bill in this area, or are we just kind of going off what we've had as guidance for the last several years from the IRS? Going off what?

Speaker 2: 12:10

we've had as guidance for the last several years from the IRS, so some of the amounts have gone up a little bit. So for lower income families who are paying for the child tax credits, child and pending care credits, you can actually deduct more. So 35% of 6,000, which I believe I don't have those numbers in front of me, but it goes from 20% to 35%. So if you're between adjusted gross income of zero to $15,000, then you can take 35% of the $3,000 or $6,000 that you're spending on depending care expenses. That's a pretty low number for AGI, especially in Massachusetts. So I think a lot of people are probably going to be in like the 20%. There is a phase out range between 20 and 35, between 15,000 of AGI and 43,000 of AGI Again pretty hard to live off of. You know Massachusetts, um, let alone the rest of the country, at 43,000 AGI. So I'm not sure how many people will qualify for that. But there is some enhanced credits for lower income households.

Speaker 1: 13:39

Cool. And then one final question. I you know I hear reference in the news to a, you know, marriage penalty or marriage advantage. I always see differences in tax impact if you're married filing jointly versus married filing individually, and almost all the time it seems to make more sense to file jointly if you're married with your wife or your husband. But what other scenarios in which it makes sense to file independently?

Speaker 2: 14:08

What other scenarios in which it makes sense to file independently. It's very rare that we come across a situation where it makes sense to file independently. I can probably count on one hand the amount of times that it made sense to have clients do that over the years. The marriage penalty has to do more with, like the phase outs. So you would think that, similar to the child tax credit which you know phases out at $200,000 for single filers and $400,000 for married filing joint, that makes sense, right? You have two incomes, two people working and you think that it would double Oftentimes phase-outs for other tax credits and tax deductions. It's not doubled.

Speaker 2: 15:07

For the for married filing joint. It might be, you know, only like $50,000 higher. You know, say, like a hundred thousand single and 150 for married filing joint, and that's where the marriage penalty comes in because you're earning so much more income potentially with two people. But, um, you're, you're phasing out of deductions more quickly. Obviously you get things like the child tax credit and child dependent care credit. So you know it might even out a little bit, but yeah, typically. So our software actually runs that analysis and it's very rare that it makes sense to do married filing separate so, um, the care for children so that the parents can work.

Speaker 1: 16:03

we talked about the child independent care credit, working until the child gets to the age of 13. Yep, but what about you know, between the age of 14 and 18, what can be expensed for chill childcare for kids of that age?

Speaker 2: 16:22

Oh, if you're a business owner, so a lot of people who are listening to this podcast, um, that's a great opportunity to potentially hire your kids and so now you can add them to payroll they can.

Speaker 1: 16:33

You know I mentioned, like the Roth contribution they need their income in order to contribute to a Roth right, so they need W-2. Yep.

Speaker 2: 16:40

And so that's a great opportunity to add them to payroll, take a deduction, and so that's a great opportunity to add them to payroll take a deduction. At 14 years old they are eligible to work, which I think that's where the 13 age comes in to play. I don't think that's just a random number and yeah, it's a huge benefit to the taxpayer, but it's also nice for the child as well.

Speaker 1: 17:14

Right, because we could do a whole other episode on the benefits of employing your children. But if they're doing something for your business and you can pay them, up to what? $13,000, $14,000 a year, basically free of federal tax? Yeah, and largely free tax, but maybe you have to pay a little state tax.

Speaker 2: 17:32

I think now you know it's like if you're going to pay them the top limit I think it's $15,000. Now Massachusetts, you're looking at like $300, $400 of state tax, so not a huge expense.

Speaker 1: 17:48

Yeah, cool, well, awesome Greg. If folks want to get in touch with you about questions about child expenses and deductibility, what's the best way for them to reach you?

Speaker 2: 17:59

So best way to reach me you can reach out email, that's gread at smartbookscom. You can also go to our website smartbookstaxcom and book a meeting with me. There we are coming. I know it's still July, but almost August at this point and we're getting close to fall. So tax planning season is knocking at the door, at the door. So you know, if you're kind of worried about your taxes this year or you know not too sure how this tax law is going to affect you, we can certainly help out with that.

Speaker 1: 18:37

Awesome, Greg. Well, thanks so much Until next time. Talk to you later.

Speaker 2: 18:41

Thanks a lot.

Speaker 1: 18:42

Bye, another episode in the books. Thank you so much for tuning in For show notes and more. Visit empoweringhealthybusinesscom. If you would like to have a one-on-one discussion with me or possibly engage SmartBooks to help with your business. You can reach me at cal C-A-L at empoweringhealthybusinesscom or message me on LinkedIn, where I am easy to find. Until next time. This is Empowering Healthy Business, the podcast for business owners. Signing off.