Step-By-Step Tax Guide : Tax Facts : Caring for Your Kids

While Uncle Sam won’t keep an eye on your children while you’re at work, he will allow you an income tax credit for your child-care expenses. According to Jeff Saccacio, manager of personal financial services at Coopers & Lybrand, taxpayers with an adjusted gross income of $10,000 or less get a credit equal to 30% of their child-care expenses. Those with higher incomes get less. For families with two or more children and the maximum allowable expense of $4,800, the credit will be at least $960.

However, you could take a different approach. If your company offers a dependent-care account, you can get a bigger break by contributing up to $5,000 in pre-tax dollars to this account. You draw reimbursements from the account for your child-care expenses. And you don’t have to count the $5,000 as income. If you’re in the 28% tax bracket, that gives you a $1,400 break--or $440 more than high-income filers would get through the child care credit.