Like many people's, my biggest expense after my mortgage is child care for my two little demons, er, darlings. And just as with my mortgage, I've always made sure to take full advantage of the tax breaks available to offset these massive costs.

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 first is a tax credit that applies to up to $3,000 in expenses for one child or $6,000 for two or more children.
  • The second is the dependent care flexible spending account (FSA) -- offered as a benefit by some employers -- which allows you to set aside up to $5,000 a year tax-free for child-care expenses. This amount is fixed no matter how many children you have.
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
  • Max out your expenses. If you have an au pair or live-in nanny, you can deduct any costs you incur from having that person live with you. Even with a live-out nanny, you can deduct the cost of any food, insurance, or transportation you provide. You can also deduct any taxes you pay on the caretaker's behalf.
  • Double up and get a discount. Many care providers, including day camps, offer sibling discounts. Take advantage of them whenever practical and save 10%-20%.
  • Share care and cut costs. Consider a nanny share. Popular in more expensive areas of the country, a nanny share -- where two families share one caregiver -- can actually be cheaper than daycare. The Nanny Network site offers more details.
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.

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37 Comments

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lynnbrown45

O yeah there great credit's --- IF you can take them for the past 3 years the IRS has found a way to keep me from getting them !!

October 01 2011 at 2:38 AM Report abuse rate up rate down Reply
l75holt81

The so called "help" for people who don't make enough for these tax credits is a crock. You got to put yourself into major debt to be eligible for those breaks. Also one of those "helps" is Earned Income Credit. It is a "gift" (really stealing) from other tax payers to supposedly reward people who work, rather than be on welfare. In reality, anytime the government "helps" you, they keep you down in poverty and dependent. You lose your confidence and become pathetic. With things like disability or SSI for children, they don't care what your actual expenses or your debts are, you get a minimum, and you have to spend the equivalent of a full time job keeping records of everything. They don't tell you what all the rules are without demanding them and you got to go through "fire" to get permission to use the money for other than a short list of expenses decided by "goodie two shoes", who have no idea of your/that kind of situation.

September 30 2011 at 11:23 PM Report abuse rate up rate down Reply
l75holt81

The Tax Code will probably never get changed because the gov't is full of rich lawyers, accountants, and people who can afford these services to get them all the tax breaks. Then there's all the Big businesses like H&R Block, Jackson Hewitt, and the software companies that make money selling us the programs to do our taxes.

September 30 2011 at 11:04 PM Report abuse rate up rate down Reply
jamesd790

It's a sad commentary that our tax code is so complicated that we have to hire accountants and read case by case explanations of various situations. Here's an idea ...let's go with a consumption tax instead of our current income tax or go with a simple flat tax that applies to all individuals or businesses. How much time, effort, frustration and billions of dollars could be saved with a tax system that's simple and would include every person and business who either buys something or has income. No big corporation would slither out of paying taxes and no Federal Income tax scheme that's only actually paid by about half the citizenry.

September 30 2011 at 10:25 PM Report abuse rate up rate down Reply
Vickie

Tough - where is the tax break for single people who support YOU FRICKING kids? we single folks get nailed year after year after year - we should get a break for NOT having kids

September 30 2011 at 5:54 AM Report abuse +1 rate up rate down Reply
3 replies to Vickie's comment
marvamd

Lisa: The tuition you pay for college students can (usually) qualify you for a education credit. Health insurance if paid for through an employer's benefit plan (FSA or cafeteria plan) has income tax savings. Both can reduce the income taxe you owe to IRS. Good Luck, keep asking those questions.

September 30 2011 at 5:30 AM Report abuse rate up rate down Reply
Lisa

I wish I had options to save on my taxes, health insurance, car insurance, etc., Everytime I ask my tax advisor, "What can I do, how can I save"? its always, " You don't pay enough taxes out of your earnings in order to be qualified for such savings." Whats up with that? I dont own a house anymore, my husband passed away a few years ago, I finished raising two teenage girls, (college tuition, car insurance, health insurance) WHERE IS HELP FOR ME????

September 29 2011 at 11:42 PM Report abuse rate up rate down Reply
Papa Cats

The chocolate city is "Big" & "Easy" .. & very very easy to milk...
& I like ..chocolate milk !! Some can live for free, eat for free & enjoy the freedom that's free to enjoy !!
But don't come down here thinking you gonna get what's already got !!
Cause that **** won't do nuttin' but get you kilt !!..
& you know the Big Easy don't play...when it comes to Chocolate milk !!!
Just think about it... & enjoy the times in which we're living !!
Cause alot of folks is taking.. & not so much giving !!!

September 29 2011 at 11:12 PM Report abuse rate up rate down Reply
egghr53

That's why your moma is in jail now. Big mouth lunatic!

September 29 2011 at 8:25 PM Report abuse rate up rate down Reply
wvnewcastle

Hi kevinm449 I just read your comment on this page. You must have read my mine. I have repeatedly said to people what you have on this page of comments. Keep up the good work.

September 29 2011 at 7:22 PM Report abuse rate up rate down Reply