If you have young children, tax breaks may help make it more affordable to pay for their care.
* Dependent care tax credits. As much as $3,000 that you spend on one child under age 13 will qualify for this credit. For two or more young children, the maximum is $6,000.
In order to get this credit, the money must be spent for child care so that a parent can go to work, look for work, or go to school full-time. Home care, day care, and day camp tuition is covered but not money you spend on overnight camp. If your family income is over $43,000, the credit rate is 20 percent (lower incomes get a credit rate as high as 35 percent.)
Suppose you and your spouse both work and your joint income exceeds $43,000. While your two young children are not in school, you pay a total of $7,000 for their care this year. The first $6,000 is eligible for a 20 percent credit, which cuts your tax bill by $1,200–20 percent of $6,000.
* Flexible savings accounts. Extra savings might be available if you or your spouse participates in an employer’s flexible savings account (FSA) that covers dependent care, such FSAFEDS. Up to $5,000 per family can be contributed to an FSA and used for dependent care expenses, tax-free. As long as your tax bracket is 25 percent or higher (over $67,900 in taxable income on a joint return this year), you’re better off using an FSA to pay for child care.
Say you spend $7,000 on child care this year. The first $5,000 can be paid from an FSA. In a 25 percent bracket, you’d save $1,250–25 percent of $5,000. Using $5,000 from the FSA reduces the amount you can use for the dependent care credit from $6,000 to $1,000. Thus, your dependent care credit would save you another $200–20 percent of $1,000.