So imagine my chagrin when I realized I've missed out on $200 in tax savings each year for the past five years!
Yes, thanks to confusing and often misunderstood rules surrounding child-care tax breaks, I've overpaid Uncle Sam to the tune of $1,000. Read on to avoid my mistake -- unless you happen to enjoy filing mounds of amended returns.
2 Tax Breaks for Parents
If you have kids and need child care in order to work (this can include actively looking for work or attending school full-time), there are two potential tax breaks available to you:
The "qualifying child," in tax-speak, must be 12 or younger and be claimed on your taxes as a dependent. (As with everything IRS-related, there are all sorts of qualifiers and exceptions, so if your situation is the least bit unusual, make sure you check with an accountant. There's also more information here on the IRS website.)
What kind of care is eligible for these tax breaks? Daycare counts, as does preschool. A full-time nanny or au pair counts, too. For school-age children, before- and after-school expenses can be deducted, but not private school tuition for kindergarten or above (private preschool is fine).
Parents with kids in private school should make sure any before- or after-care costs are broken out separately on their statements. Day camp fees are deductible, but overnight camp costs are not. (Obviously the IRS has no idea how much more productive parents whose kids are gone for a week or two can be!)
Which Money-Saving Option Should You Take?
Now here's the tough part: Do you take the credit or fund the FSA? Of course, the answer is "it depends."
Generally speaking, if you make more than $43,000, you'll want to opt for the FSA. Above $43,000, the credit gives you 20% of the amount you spend up to the maximum (that is, a maximum of $600 for one child, $1,200 for two or more). With the FSA, as long as you're in the 15% tax bracket or higher, you'll save at least 22.65% of your care expenses (15% Federal taxes + 7.65% Social Security/Medicare taxes). Again, check with an accountant for specifics on your situation.
Can I Take Both? (What I Didn't Know)
Maybe, and here's the part I missed: If you have two or more qualifying children and your expenses are at least $6,000, you can actually benefit from both options. For instance, if you spend $6,000 on child care, you can use your FSA for $5,000, and apply the credit to the remaining $1,000 in expenses. Since the credit gives you back 20% of that $1,000, it means an additional $200 for those families.
Even more ways to save What other ways do you save on child care? Share your money saving tips in the comments area below.
Motley Fool writer Robyn Gearey is not going to miss out on her $200 in child care savings ever again.