Problem: How can I lower my childcare costs?

        Strategy: Use a flexible spending account to take advantage of tax benefits.

        Crystal Faulkner, certified public accountant with Cooney Faulkner & Stevens, says that flexible spending accounts, which are offered by many employers, allow you to deduct as much as $5,000 a year from your pretax income.

        This means that you do not have to pay tax on this money. Depending on your tax bracket, you can save over $2,000 with a flexible spending account. You just have to be careful to spend all of the money that you have set aside by the end of the year or you lose it. Another consideration is if you use the filing status of married filing separate, each spouse is limited to $2,500 for childcare costs through a flexible spending account.

        A variety of costs qualify as childcare costs. In-home care as well as the cost of a nanny or au pair also counts. Many schools offer before and after care programs, which also qualify as childcare costs. Summer camps even count.

        You just have to be sure that if you are paying an individual, you issue the childcare provider a 1099 or W-2 form so that they report the earnings. You will have to report the name and tax ID number of the childcare provider on your individual tax return.

        If you are not eligible for a flexible spending account, you may be able to take advantage of the childcare credit.

        The credit is equal to a percentage of unreimbursed childcare costs, up to $2,400 for one qualifying child and $4,800 for two or more children. To be eligible, your child must be under the age of 13 or a dependent of any age that is mentally or physically handicapped. The credit ranges between 20 and 30 percent, depending on your income.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.

        Planners: Share your unique tips with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati, OH 45202 or e-mail ahiggins@enquirer.com.

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