Employees who have a dependent may take a tax credit on their United States Federal Income Tax return on a portion of the expenses incurred to care for the dependent so that the employee can work. Beginning in 2003, the tax credit was limited to a portion of the first $3,000 spent on one dependent or a portion of the first $6,000 spent on two or more dependents.

Except: 1. If the employee and spouse file their taxes under the marital status of "Married - filing separately" they cannot take any tax credit.

2. If the employee files a 1040EZ, there is no place to claim a tax credit for dependent care expenses.

Instead of the tax credit, some employers, including the state of Ohio, may offer a flexible spending account to their employees. A flexible spending account allows the employer to set aside money out of the employee’s paycheck before income taxes are calculated. The money set aside is then available to the employee to reimburse himself/herself after incurring and paying for work-related dependent care expenses. The employee submits documentation showing the amount of money paid for dependent care, the name of the provider and the dates the care took place. The money is reimbursed to the employee out of his/her account and is still not taxed. Most people find greater tax savings using a flexibile spending account than taking a tax credit.

People who file their taxes "married - filing separately" can shelter up to $2,500 each in a flexbile spending account, whereas they cannot take any tax credit.

All others can shelter up to $5,000 per family no matter how many dependents they have. So if you have one dependent you can still shelter up to $5,000, which is usually better than taking a partial tax credit on $3,000.

If your expenses are greater than $5,000, you may set aside $5,000 in the DCSA. Then you may take a partial tax credit on up to $1,000 of additional expenses.

All employees participating in a dependent care plan must declare their usage on a tax report called "Child and Dependent Care Expenses". If you file a US federal income tax return Form 1040, then you must complete a Form 2441; if you file a Form 1040A, then you must complete Schedule B.

If you have previously filed a 1040EZ, you will now file either a 1040 or a 1040A and declare your dependent care expenses on the appropriate form listed above.

However, you should never shelter more money in a flexible spending account than you know you will spend. The federal law stipulates, "Use it or lose it." If you tell your employer to set aside $5,000, but then you only spend $4,700, the remaining $300 would be forfeited to the employer. So while very few people lose any money, it is your responsibility to plan carefully. Please see the DCSA Estimate Worksheet in this booklet.