In the United States, more babies are born in the summer than any other season.  Why is that important?  Because if you've just had or are about to have a baby and you anticipate childcare expenses in 2012, this tip may save you as much as $1,700.

If you or your spouse have access to a Flexible Spending Account ("FSA") at your office, you'll be able to pay for up to $5,000 of childcare expenses using pre-tax dollars.  That means you'll pay no income taxes or Social Security or Medicare taxes on that portion of your income.  That'll save you $2,000 to $2,300 per year, depending on your marginal tax rate.

Unfortunately, FSAs only allow enrollment once a year.  If you're not already enrolled for 2012, you'll have to wait until 2013 -- unless you've just had a "life-changing event" (i.e. the birth of a child).  If so, you have a 30-day window after the birth of your child to enroll.

If you miss the window or don't have acces to an FSA, you can still capitalize on the Child and Dependent Care Tax Credit.  If you have one child, it'll save you up to $600 per year; if you have 2 or more children, you'll save up to $1,200 per year.  For more information, visit our Expert Advice page.

If you hired a caregiver for your dependent child (or parent) in 2011, you may be entitled to the Child or Dependent Care Tax Credit.  Qualifying expenses include wages paid to caregivers, taxes paid on those wages, fees paid to a placement agency to help you find the caregiver and any daycare or daycamp fees (overnight camps may not be included).

You can itemize up to $3,000 per dependent per year (up to a maximum of $6,000).  If you utilized a Flexible Spending Account, you'll have to deduct those funds from your total.

To qualify for the tax credit, your child(ren) must be under age 13 and you must pass the "work-related test," which means that the care expenses were necessary so that you and your spouse can work, look for work or go to school full-time. 

The expenses are itemized on Form 2441 and included with your federal income tax return, which is due April 17, 2012.  Click here for more information about tax breaks for care-related expenses.

Families who have care-related expenses for qualified dependents are able to file for the federal Child or Dependent Care Tax Credit on Form 2441 with their 1040.  There is no income restriction on this tax credit, but both parents must work, be looking for work or be full-time students.

QUALIFYING EXPENSES

Itemizable expenses include: 

1. Wages paid to a caregiver;
2. Employer taxes paid on those wages;
3. Fees paid to a placement agency in order to find the caregiver;
4. Fees paid to a daycare or daycamp (overnight camps do not qualify).

EXPENSE LIMITS

Families with one child under age 13 can itemize up to $3,000 per year while families with two or more children can itemize up to $6,000 per year.

TAX CREDIT PERCENTAGE

The tax credit percentage is based on the family's adjusted gross income.  Most families will get a 20% credit, which yields a direct tax reduction of $600 per year (for one child) or $1,200 per year (for two or more children).

FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN)

If you have a nanny, in order to take the credit you will need to have obtained a Federal EIN.  That number should be applied to the nanny's wages and the employer taxes for that nanny.  If you itemize fees paid to an agency or daycare, those expenses would utilize the companies' EIN (Note: if you've already reached your expense limit with the nanny's wages, there is no need to chase down these business EINs).  In addition, you'll need to make sure you follow the other federal and state nanny tax obligations.

Let us know if you have any questions.

If you anticipate having childcare expenses in 2011 (i.e. nanny or daycare), now is the time to check with your company’s HR department to see if you have access to a Flexible Spending Account (FSA).  If you or your spouse have access, you’ll be able to pay for up to $5,000 of your nanny expenses with pre-tax dollars.  Depending on your marginal tax rate, this will save you between $2,000 and $2,300 each year.

Check now because most companies have open enrollment in the fall and, if you miss it, you’ll have to wait until the next enrollment period.

If you miss the enrollment period, you can still take advantage of the Child or Dependent Care Tax Credit.  However, for most families, the savings are much less: $600 if you have one child or $1,200 if you have two or more children.

For more info on childcare tax breaks, visit our Answers section or give us a call.