Analyzing the Tax Cut Deal

President Obama signed a tax bill into law yesterday (Friday) that gives us some clarity on what the tax situation will be for 2011 and 2012.  Here are the highlights of the bill:

• Tax brackets to remain the same, with a 10% bottom rate and a 35% top rate.  Without this legislation, the bottom rate would have increased to 15% and the top rate to 39.6%.
• A "payroll tax holiday" that reduces the amount of FICA withholding by 2% (self-employed taxpayers will see their self-employment tax decrease by 2%).  For a person making $40,000/year, this would equal an $800 savings.  (But the Making Work Pay Credit is expiring, which negates some of the savings.)
• Another "patch" to the Alternative Minimum Tax that will help millions of taxpayers avoid this tax.
• The capital gains and qualified dividends rates remain at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the higher tax brackets. 
• The Child Tax Credit will remain at $1,000 (it had been set to decrease to $500 in 2011).
• You can claim dependent care expenses of $3,000 for one child or $6,000 for two or more children.  These amounts had been set to decrease to $2,400 and $4,800.
• The expanded Earned Income Credit remains in place through 2012.
• The credit available for energy efficient upgrades to your home remains in place through 2012 (it had been set to expire at the end of this year).
• Extension of the American Opportunity Credit for college expenses, and an extension of the "above-the-line" deduction for college expenses.
• Special 100% "bonus depreciation" for purchases of brand-new assets from September 9, 2010, through the end of 2011.
• The estate tax returns with a $5 million exemption per person, and a 35% top rate, retroactive to January 1, 2010.  Estates arising in 2010 will have the option of of using these rules, or using the "old rules" of no estate tax and a reduction in the amount of increase in carryover basis.

Can I Deduct Summer Camp Expenses?

If you send your kids to camp this summer, you might be able to deduct the cost on your tax return. The IRS allows a deduction for summer day camps, but not for overnight camps. In order for a day camp to be deductible, you have to meet two basic rules.

1. Your child must be under age 13.
2. The expenses must be incurred so you can work or look for work.

These are the same rules that have to be met in order to deduct daycare expenses.
The cost of the day camp would be included with your other childcare expenses, such as daycare expenses. You can claim up to $3,000 of childcare expenses per child per year, up to a maximum of $6,000 total for two or more kids. You then get to claim a credit of between 20-35% of that amount, depending on your income.
As mentioned earlier, the cost of overnight camps is not deductible, nor is the cost of sending your kids to summer school.

This is a basic overview of the subject. As always, if you have specific questions about your situation, consult your tax advisor.