Basics

• For one dependent or other person who requires professional care, you may claim up to $3,000 of dependent care expenses in 2010. For two or more dependents, the maximum amount you may claim is $6,000. If you spent less than those amounts on child care, that amount you spent is your claim limit. The actual credit is a percentage of the amount of your claimable expenses. You can claim 35 percent of your expenses if you made less than $15,000 in 2010. The percentage then drops incrementally to 20 percent for incomes of more than $43,000. So if you made $50,000 and had more than $6,000 in child care expenses for two kids, your credit would be 20 percent of $6,000 -- $1,200.
  
  

Requirements

• You can claim the Child and Dependent Care Credit if the care was for a child or children younger than 13, or for spouses or older dependents who cannot care for themselves because of a handicap or disability. The care must have been for the sake of allowing you -- and your spouse in the case of joint returns -- to work or seek work. In addition, your filing status cannot be married filing separately. If you are married, you must file a joint return to claim the credit.
  
  

Considerations

• Day camp is a form of child care that qualifies you for the credit. Overnight camps do not count, however. The Child and Dependent Care Credit is a nonrefundable credit. Unlike refundable credits such as the Earned Income Credit, the most it can do is take your tax payment to zero. In the prior example, if you can take a credit of $1,200 but owe only $1,000 in taxes, the actual value of your credit would be $1,000.
  
  

Alternative

• Flexible spending accounts through an employer can be more worthwhile with respect to taxes than the Child and Dependent Care Credit. You contribute to FSAs, as with 401k accounts, on a before-tax basis, thus reducing your taxable income and avoiding the 7.65-percent tax for Social Security and Medicare on that money. Depending on your tax bracket and the amount you contribute to your FSA, this reduction could exceed what you would get from the child care credit. If you are in the 25-percent tax bracket and contribute the maximum $5,000 to your FSA, for example, you would reduce your tax bill by 32.65 percent of that amount, or $1,632.50