When school is out, what do your children do? Parents may send children to summer camp or special school programs or make other child arrangements. Some older children may go to work. There may be tax breaks for these activities.DEPENDENT CARE CREDITIf your child is under age 13 (or a child of any age who is physically or mentally incapable of caring for himself or herself) and you work full time or part time, you may be eligible for a tax credit. The credit, which is based on eligible expenses up to $3,000 for one dependent and $6,000 for two or more dependents, ranges from 20% to 35%, depending on your adjusted gross income (AGI). For those with AGI over $43,000, the credit rate is 20%. Thus, the top credit for those at the 20% rate is $1,010 for one dependent and $2,100 for two or more dependents.A variety of expenses incurred both in and out of the home can qualify for the credit.- Compensation to a babysitter, housekeeper, or au pair to watch your child. Also include employment taxes you may pay for a housekeeper.- Daycare costs.- Costs for day camp, including a speciality camp such as a soccer or computer campINELIGIBLE EXPENSES: The cost of sleepaway camp is not an eligible expense for purposes of the dependent care credit. Also, transportation costs to day care or paying for the transportation costs of someone working in your home does not qualify for the credit.SPECIAL NEEDS CHILDRENThe cost of education for special needs children, which may continue throughout the summer months, can qualify as a deductible medical expenses are deductible only as itemized deductions to the extent they exceed 7.5% of AGI). The schooling must be on a doctor's recommendation, so a physically or mentally disabled dependent can attend a program to alleviate or overcome the disability.Note: Outside-the-home care costs for a special needs dependent may qualify for the dependent care credit. However, the same expenses can only be taken into account once (either for a medical deductions or dependent care credit).PUTTING YOUR CHILD TO WORKIf you own a business, you may be able to employ your child this summer. Given the tight job market, this may be the only way your child can earn money and gain work experience now.Wages paid to your child are deductible by the business. Wages up to $5,700 in 2009 are not taxable to your child. If, for example, you paid your child $16 an hour for a 35-hour work week, he or she would reach the tax-free limit in about 10 weeks.What's more, he or she can use these earnings to get a jump on retirement savings. Up to $5,000 can be used to fund an IRA. It's probably wise for a child to opt for a Roth IRA; they usually won't need the tax deduction for a traditional IRA, and earnings in the Roth IRA build up tax free.If you're self-employed and your child is under 18, there are no FICA (Social Security and Medicare) taxes or FUTA (federal unemployment) taxes. There may, however, be taxes and other insurance obligations at the state level.Caution: Make sure you pay your child only reasonable compensation for work actually performed. Since the IRS pays extra attention to family-related write-offs, keep time slips and other records of your child's work.
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