I am a new mother. Can I write off my day-care expenses?
While you won't be able to recoup the sleep you lost during those midnight feedings, if you're a working mother (full time or part time), Uncle Sam does offer some relief. These breaks come in two different forms. You can either use pretax dollars to pay for up to $5,000 in child-care expenses through a flexible spending account, or FSA, offered by your employer. Alternatively, when you file your taxes, you can take a partial credit on up to $2,400 in child-care expenses (if you have one child) or $4,800 in expenses (if you have two or more). Mercifully, the definition of "expenses" is pretty generous it generally includes the cost of preschool, a nanny and even summer camp.
To take advantage of these tax breaks your child must be younger than age 13 and the child care must enable you (and your spouse, if you have one) to work, explains Stephanie Breedlove, CPA and partner of Breedlove & Associates, a nanny consulting service in Austin, Texas. (An exception: if one parent is a full-time student or severely disabled.)
You generally can't take advantage of both tax breaks. But if your employer offers a dependent-care FSA, this is almost always the way to go. With the FSA you can shield up to $5,000 of your income from federal, state and local taxes as well as Social Security and Medicare taxes. Just make sure you don't put more in your account than you need for the year. FSAs operate on a "use it or lose it" basis, so any leftovers at the end of the year will be lost to you forever. Of course, given the cost of child care these days, chances are you'll end the year wishing you could exempt more of your income from taxes. (For more on dependent-care FSAs, see our previous Ask SmartMoney.)
Even if you've never heard about a flexible spending account program at your company, you should check with your human resources department to make sure. "Most companies don't advertise it because not everyone in the company needs to take advantage of it," says Breedlove.
The child- and dependent-care tax credit is clearly not as lucrative. Depending on your income, it will only allow you to recoup 20% to 30% of your expenses up to the limits mentioned above. If your adjusted gross income exceeds $28,000, for instance, the maximum credit you can receive is $480 for one dependent and $960 for two or more dependents. You'll need to fill out IRS Form 2441 if you're filing Form 1040.
Keep in mind, you won't be able to get any tax relief if you're paying your neighborhood babysitter under the table. If you're paying a babysitter or nanny more than $1,200 a year, you are by law required to withhold payroll taxes. For more on this, see our story "The Nanny Tax."