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Why There is no Tax Reduction for MathPath Tuition

Note: The answers below are the ones we have always given, but parents have sometimes questioned our answers – see the first Q and A below. Therefore, we have now spent many hours researching federal documents and consulting with lawyers. This effort has confirmed even more strongly our previous answers. We consider the matter closed. We need to spend our time maintaining and improving the mathematics of MathPath.

In many cases, payments for dependent care for children under age 13, when they allow parents to work, can be counted for US tax credits or deductions, the latter often though the use of pretax dollars in Dependent Care Flexible Spending Accounts (DCFSA). However, we have concluded that no part of your MathPath fee is eligible for such tax savings and thus, in particular, no part may be paid out of a DCFSA.

Federal rules about taxes take three forms: laws (US Code), regulations, and publications from IRS. The laws are primary, but usually they are stated in general terms. It is then left to the Code of Federal Regulations (CFR) to work out the details and give examples. Then these examples are restated with further explanation in IRS Publications (Pub 503 for child care tax savings). Also, when regulations are first proposed to flesh out a new or amended law, there is a period where public comment is invited. The Treasury then announces final regulations and provides commentary on how these were arrived at.

However, the federal law for child care expenses has an unusually explicit clause about overnight camps. The law is

US Code TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter A > PART IV > Subpart A > §21:
Expenses for Household and Dependent Care Services Necessary for Gainful Employment

This section was last amended in 2005, and it contains the following definition of "employment-related expenses" in Subsection 21(b)(2)(A), boldface added by us:

(2) Employment-related expenses
(A) In general
The term "employment-related expenses" means amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the taxpayer:

  • (i) expenses for household services, and
  • (ii) expenses for the care of a qualifying individual.

Such term shall not include any amount paid for services outside the taxpayer's household at a camp where the qualifying individual stays overnight.

For the entire Section, click here.

The law does not say anything specific about day camps, nor about after-school centers, nor is it very specific about what constitutes dependent care services as opposed to either schooling or room and board, which do not receive a tax advantage. Therefore, except in the case of overnight camps, all this was left to the regulations to clarify, which were most recently finalized on October 9, 2007. These regulations allowed after school clubs of schools to be counted as dependent care service, allowed an allocation of some costs of other services to be counted as dependent care, and allowed the whole cost of day camps to be counted (as an "administrative convenience"), even though this cost includes food and often an educational component. But it could do nothing about the costs of overnight camps, as their complete exclusion was written into the law. So Federal Regulations, Title 26, Section 1.21-1 (d)(6) echo the law by saying

Overnight camps. Expenses for overnight camps are not employment-related expenses.

For the complete regulations for Title 26, Secion 1.21-1, click here.

Perhaps you might think that an allocation of the day part of the cost of an overnight camp was not given as an example for tax savings in the regulations because nobody thought of that example. Not true. During the comment period on the proposed regulations, exactly this allocation was proposed by a commentator and this proposal was rejected. Specifically, the final announcement of the regulations says, in Section 2.f. of the Explanation of Provisions and Summary of Comments:

Cost of overnight camp

A commentator suggested that the credit should be allowed for a portion of the cost of overnight camp allocable to time when parents work. The final regulations do not adopt this comment. Under section 21(b)(2) [of the law], the cost of overnight camp is not an employment-related expense.

For the whole commentary, click here.

Question: The above notwithstanding, families have written to us that they know of overnight camps where a day cost has been broken out. So why can't MathPath do the same?

Answer: Without knowing exact information, we cannot comment with any certainty about such camps. It may be that such camps publicize and run both a day and a night program, with different staff and separate budgets, and that one pays a day fee and a night fee if a child stays overnight. In such cases IRS might consider that the day fee is an eligible child care expense. However, the lawyers we have consulted suggest that even this would "sail close to the wind". Or it might be that the programs are not really separate but that so far the division of billing has flown under the radar of IRS.

We do know the exact information about MathPath. We don't run a day program and don't want to run a day program; we believe that the whole residential experience is important. On the rare occasion that an admitted student lives close to our location and the family has asked, we have allowed a student to go home at night. However, we have not encouraged this, we have asked the student to stay around into the evening well beyond work hours, and we have not modified the costs based on a detailed division of our costs into a workday part and the rest. Indeed, such a division would be difficult to calculate. Furthermore, if we took the effort to calculate it and announced it, it would let families declare a tax benefit of dubious legality. Needless to say, IRS might well challenge our actions and might well change your tax return, with possible interest charges and penalties. Even if we could successfully defend our allocation of costs, it would take time and money we don't have.

Question: Do we think the overnight camp tax rule is fair?

Answer: No we don't, but it doesn't matter what we think, because the overnight camp rule is written directly into the law. The only recourse is to change the law. So if you are upset about this situation, write to your Senators and Representative, pointing out that the entire cost of day camp is eligible for beneficial tax treatment, but none of the cost of overnight camp is, even the day part, and could Section 21(b)(2)(A) of the Internal Revenue Code be modified by removing the unusually explicit reference to overnight camps. Of course, tax laws are changed with difficulty, especially in the current national political climate. Short of a law change, the most that IRS has free hands to do using regulations to increase equitable treatment to camps may be to reduce or eliminate the tax benefit for the cost of day camps, which is surely not the result you want.

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Created December 29, 2011