How to Write Off the Costs of Summer
Tax savings for summer camp? For backyard barbecues? Yes, it may be true.
(MONEY Magazine) – Summertime, and the livin' is supposed to be easy. But after dropping $150 on a trip to the ballpark, a grand or two on summer camp and several more on a family vacation, you may end up longing for the cold and wet months. Believe it or not, though, some summer spending may be deductible next April. So as you pour yourself a daiquiri, consider the following tax strategies.
STRATEGY NO. 1
Write off camp
» YOU QUALIFY IF You have dependent kids under age 13 and send them to summer day camp so that you and your spouse can work or go to school.
» HOW IT WORKS The size of the tax credit you can claim for dependent-care expenses depends on your income. If you make more than $43,000, you can claim a credit of 20% of your costs, up to $600 in credits for one child and up to $1,200 for two or more kids. (Credits reduce your tax bill dollar for dollar, while deductions reduce the income on which you pay tax.)
» CAVEAT If you have a flexible spending account (FSA) at work, it may offer even better savings. You can put aside up to $5,000 a year in pretax dollars for child-care expenses in an FSA. So if, for example, you're in the 35% tax bracket, you'll save $1,750 at tax time (plus FICA taxes), or about $750 more than the $1,000 credit you'd otherwise get for those expenses. Run your numbers both ways to see which gets you a bigger benefit. If you have more than $5,000 in expenses, you can claim an additional credit of up to $200.
» ONE MORE WARNING Sleepaway camp doesn't count, says Bob Scharin of RIA's Practical Tax Strategies, a journal for tax pros. That's considered a luxury.
STRATEGY NO. 2
TAKE YOUR FAMILY ON A BUSINESS TRIP
» YOU QUALIFY IF You're traveling primarily for business and bring along your family.
» HOW IT WORKS If you plan a business trip and decide to bring the family and stay a few extra days, you can deduct some of your own travel costs as business expenses. As long as more than 50% of the trip is dedicated to business, your actual travel costs (like air fare) are fully deductible, says Martin Nissenbaum, national director of income tax planning at Ernst & Young. Other costs are prorated: If you go to Florida for seven days, for example, and spend four of them at a conference, four-sevenths of your hotel and rental-car costs are considered business expenses.
» CAVEAT Your family's travel costs are not deductible--unless you all pile in the car. Then you can deduct 40.5¢ a mile and your family rides free, says Scharin.
STRATEGY NO. 3
DEDUCT A BACKYARD BARBECUE
» YOU QUALIFY IF You're not reimbursed for out-of-pocket business expenses or you're self-employed.
» HOW IT WORKS The function's main purpose must be business, but guests don't all have to be business associates.
» CAVEAT If, say, 40% of attendees are friends, then only 60% of the BBQ's costs may be claimed as a business expense (half of which may be written off).
STRATEGY NO. 4
PUT YOUR KIDS ON THE PAYROLL
» YOU QUALIFY IF You run your own business (even as a sideline to your regular job) and your kids will be around the house this summer.
» HOW IT WORKS You can hire your dependent child and deduct his wages on your business tax return. You'll save because you'll in effect be shifting some of your income into your child's lower tax bracket. And if your child is under 18, you won't owe FICA taxes on his wages.
» CAVEAT Hiring your teenager could ruin your summer--or your relationship.
STRATEGY NO. 5
TRADE A WEEK OF SUMMER FOR A WEEK OF WINTER
» YOU QUALIFY IF You own a beach house and are willing to rent it out.
» HOW IT WORKS If you let it for fewer than 15 days a year, that income is not taxed. Think about it: A week or two away from the beach this summer could translate into a free trip to Aruba in the dead of winter. Ahhh.