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Summer time is neither lazy nor hazy for Brigitte Johnson Herron, 46, of Silver Spring, Maryland. “I work full time as communications director of a nonprofit organization,” she says. “My husband Reginald [also 46] is in sales, so he’s busy, too. We have two children: 8 years, and an 18-month-old. They obviously need to be cared for while we’re at work, and that becomes more difficult in the summer when school is out.”
Fortunately, help is available from Uncle Sam in the way of tax savings. As summer approaches, savvy planning can lead to sizzling tax breaks for parents and for those who want to mix business travel with pleasure. At the same time, business owners and investors may find mid-year to be an ideal time for locking in tax breaks for the remainder of 2004.
“I send a mid-year letter to my clients, telling them what to do in terms of tax planning,” says Dywane Hall, a principal in the Alexandria, Virginia, office of LPL Financial Services. “I want to make sure they’re fully funding their 401(k) plans, for example, and that they make enough estimated tax payments to avoid penalties. I remind some clients that if they want to set up a SIMPLE retirement plan for their company or for self-employment income, they must act by Oct. 1 to get the benefits for 2004.”
Taking the Pressure Off Parents
Other people have even more pressing needs. While school is out, the Herrons must find childcare for their 8-year-old son. “We’re looking at day camps,” says Brigitte. “We might send him to a sports camp or an art camp, depending on where we think he might enjoy himself.” Parents like the Herrons should know there are several tax options that help take the financial burden off caring for children. Here are a few of them:
Dependent care tax credits. Fortunately, money that parents spend on childcare will qualify for a dependent care credit. “In 2004, as much as $3,000 that you spend on one child under age 13 will qualify,” says Genevia Gee Fulbright of Fulbright & Fulbright, an accounting firm in Durham, North Carolina. “For two or more children, the maximum is $6,000.” Just a couple of years ago, those ceilings were $2,400 and $4,800.
In order to get this credit, the money must be spent for childcare so that a parent can go to work or be a full-time student. “Homecare, daycare, and day camp tuition is covered, but money you spend on overnight camp won’t qualify for this credit,” says Fulbright. If your family income is more than $43,000, the credit rate is 20% — lower incomes get a credit rate as high as 35%.
To see how this might work, suppose you and your spouse both work and your joint income exceeds $43,000. While your two young children are out of school, you send them to day camp, paying $7,000 in fees this year. In this situation, the first $6,000 is eligible for a 20% credit, which cuts your tax bill by