Did you know you may combine all the allowable child care expenses for your family and use them for only one child?
Neither did I! I cannot believe that in all the years of giving tax advice, I did not know this.
Let’s walk through an example:
Your family has 3 children: Robert 15, Adrian 13 and Deborah age 11. Deborah also qualifies for the Disability Tax Credit. The family limit for Child Care Expenses is $21,000 ($5,000 + $5,000 + $11,000). Visit TaxTips.ca for a detailed breakdown of what each child may claim.
Robert and Adrian hang with friends after school and do not need child care. Deborah has very high needs and must be supervised at all times. In this case, the family may claim up to $21,000 annually for Deborah’s child care.
Child Care Expenses are a tax deduction rather than a tax credit, so this is potentially more valuable to the family in question. Please read my page Child Care Expenses for more information.
Many thanks to Jamie Golombek of the Financial Post for bringing this to our attention.
Summer Camps receipts may be used for the Child Care tax
deduction so hang on to them!
Refresh my memory.
What is the Child Care Tax Deduction?
If you pay someone to care for your child so you can earn an income or go to school, you may be able to deduct these costs from your total income. This is often more valuable than a simple tax credit. For more information refer to my page Child Care Expenses.
As a reminder, the lower income spouse may claim up to $11,000 per child if they qualify for the Disability Tax Credit (DTC). In addition, the normal age limit of 16 does not apply assuming the child is dependent on you or your spouse.
What summer camp receipts are eligible?
Day camps and day sports school may be claimed in their entirety
towards your Child Care limit. Overnight
camps on the other hand may only be claimed up to a maximum of $275 per week, if
your child qualifies for the DTC.
You may also claim caregivers providing child care services, day nursery and day child care centers.
Remember if someone else pays the bills (i.e. the Autism Funds Unit) you cannot claim it as an expense.
Last week we saw how claiming either child care or medical expenses may be more advantageous for different families. Now I will give you some simpler guidelines to use for your situation:
- The first and foremost tip is to use tax software such as TurboTax or Ufile. Use the software purchased for the previous tax year to examine scenarios for your family. This will allow you to decide if you want to claim child care or medical expenses for this year.
- Change the variables in the software to look at the tax savings available to you. One change can so dramatically change the outcome that you can’t reliably use a simple calculator for the problem.
- When you file your tax using tax software, complete all your entries and just prior to filing, switch the medical expenses from one partner to another to see which is the most advantageous.
- Remember to examine the total tax owing as a family instead of focusing on one return.
- If the difference between the two is minimal, you may wish to simplify your filing by claiming only one category.
- If your total tax owing for the year will be below zero, you may wish to consider the refundable medical tax credit. Your tax software will calculate this automatically.
- If you are in a higher income tax bracket, it is a no brainer to claim child care expenses. Not only is your marginal tax rate higher, but you may also increase the “Family Tax Cut” savings.
- Have a good look at your non-refundable tax credits on your tax schedule. If they are higher than your tax owing, they are going to waste as you can’t reduce your tax to less than zero using non-refundable credits.
If this is all too hard, don’t beat yourself up. If you claim either expense, you are saving tax. This is something a lot of people aren’t doing and you should give yourself some credit. Well done and keep up the good work.
Continuing from our discussion last week regarding the merits of claiming child care expenses vs claiming medical expenses, we look at some actual results. It may be too technical for some of you, but please persevere as I will provide some simple solutions. I will use the example of the following fictitious family:
- A higher income spouse
- A lower income spouse
- One child who qualifies for the Disability Tax Credit (DTC)
- $2,000 in medical expenses other than ABA Therapy or child care
- $10,000 in expenses which can be claimed as either child care or medical expenses
The following rules were applied to each scenario:
- Only 2/3 of the lower income could be applied towards child care to a maximum of $10,000 (2014)
- The higher income claimed the DTC
- After reaching the end of each scenario, I used TurboTax to decide who should claim the medical expenses
It is virtually impossible to create a formula or spreadsheet to decide which one to claim because of the huge number of variables. Instead I will list some examples in the table below using TurboTax 2014. The lowest tax owing figure is highlighted in green.
||Tax Owing using child care
||Tax owing using medical expenses
*Only 2/3 of the lower income could be applied to child care so the remainder was added to medical expenses
Why is it in the first 4 examples, it could be either child care or medical expenses being more advantageous?
- A child care claim may indeed reduce an individual’s net income, but it may lower it to the point that non-refundable tax credits are going to waste as they can’t reduce tax below zero
- A child care claim may lower net family income to the point that the refundable medical expense (one of the few ways to reduce your tax below zero) becomes the greater advantage
- The medical expense claim may be advantageous if tax owing is kept above zero for both persons. The combined federal and provincial credits may reach approximately 20%
In the $80,000/$30,000 example, claiming the $10,000 as child care saves you $3,086. That is a 30.9% tax savings which is well above the marginal tax rate. Why is that?
- I admit that this was a head scratcher for me. It took some digging, but the reason is, lowering the net income of one partner increased the “Family Tax Cut” which is the fake income splitting introduced in 2014.
This is all very technical, but next week I will suggest some easy to follow “Rules of Thumb” that you can use to maximize your tax savings.
When it comes time to claim expenses on your tax form, should you claim child care or medical expenses?
A bit of background first. If you have BI’s caring for your child and you control the invoices, you have the option of putting either “Child Care” or “Tutoring” as the service rendered. Conventional wisdom says that you should claim child care expenses to the maximum allowable ($11,000 for 2015) and the remainder as “Tutoring” which is a medical expense. The logic is that child care is a tax deduction (much like an RRSP) while medical expenses are only a tax credit.
It sounds logical, but is it true?
The answer is more complex than most people realize. Let’s have a look at the pros and cons of each claim.
Firstly child care:
- It’s a tax deduction which reduces your taxable income
- You may claim $11,000 (for 2015) or 2/3 of the income of the lower income spouse, whichever is less
- The Disability Tax Credit (DTC) supplement will be reduced if you claim Child Care in excess of $2,654 (2014 figure) or $2,507 without reducing the provincial supplement.
Next medical expenses:
- Firstly the non-refundable tax credit (i.e. it can’t reduce your tax below zero)
- Only expenses in excess of $2,208 (2015) or 3% of your net income whichever is less, can be claimed
- Refundable Medical Expenses (i.e. it can reduce your tax below zero)
- For 2015 the maximum supplement is the lesser of $1,172 or 25% of medical expenses.
- This is reduced by 5% of combined net in excess of $25.939. It is eliminated when combined net income reaches $49,379
- Many people focus on the 15% federal tax credit rate and don’t realize that there is also a provincial credit which may add another 5% to the total.
Next week, the answer that completely shocked me
I received an email recently from a reader asking about child care expenses. I’ve copied it below:
Long-time fan and avid user of your website. You might recall that we have emailed a few times over the years too.
I have a question about claiming childcare costs properly on my annual taxes. Since our team of BIs primarily work 1-1 with my son, I have only been claiming those hours as childcare. For example, I don’t think a team meeting of 4 individuals would qualify as childcare.
The other monthly BI costs are related to attending team meetings, materials prep and occasional phone call with me.
I have been issuing a separate monthly receipt labelling these costs as “other intervention services” and not claiming them on my taxes. However I’ve started to think that these activities may qualify as “tutoring services” under the medical expense tax credit. Although these activities are not directly involving my son, they are valuable to his long-term care and development.
What are your thoughts on my approach for claiming these monthly activities under these categories?
I’m sure this differentiation and clarity would be helpful to your readers.
And my response:
Good to hear from you again.
Firstly, you are on the right track by claiming child care expenses before medical expenses. You may qualify for child care claims if:
- You and your partner are working
- You are going to school
- You are single or
- You are carrying on research or similar work.
Child care is a tax deduction (much like an RRSP) and will often provide a greater tax reduction than medical expenses which is a tax credit. This is especially true if you are in a higher income tax bracket.
When I create an invoice and receipt for my BI’s, I ensure that the service listed matches what I want to claim on my taxes. If I qualify for child care claims, that is what the receipt and invoice will show.
Team meetings and overlaps are all part of the process and I don’t believe that a knowing person would suggest that this is improper. To keep the bureaucrats happy, we will keep things clear and not give them details that they don’t understand. The service provided should indicate “Child Care” and nothing else.
Once you have reached the $11,000 limit for child care (assuming your child qualifies for the Disability Tax Credit) you no longer need child care receipts. I suggest that the service now indicate “Tutoring” which is claimable as a medical expense. The only point here is that you need a doctor’s letter indicating the need for such services. Once again, do not put extra detail on the invoices and receipts as this will only confuse CRA.
Hope this helps
Was my advice correct? Is it better to claim child care or medical expenses? The answer turns out to be more complex than one might imagine.
Next week, I will dive into the topic and you might find the answers surprising.