NATION New tax rules lighten financial burden of caring for dependents

The new tax rules may save parents money, but don't wait. Some strategies require quick action.
NEW YORK (Dow Jones/AP) -- When it comes to children, tax strategies are usually low on the list of things to worry about.
But if you want to save at least a couple of hundred bucks next year on the cost of caring for dependents, you might want to take some time to learn what tax breaks Uncle Sam has in store.
There are some new rules that might surprise you. And don't wait past the end of November, or it may be too late to take advantage of at least one strategy.
The two main ways to get tax breaks for child-care costs have long been the dependent-care spending account, which is a company-sponsored plan that allows workers to put aside as much as $5,000 of pretax income, and the dependent-care tax credit.
A few rules
There are some general rules of thumb that might help people know which plan is best for them.
Higher-income people will find that they can save more with the dependent-care spending account, while families that earn less than $39,000 a year need to weight the pros and cons of both strategies, experts say. This is because these people should earn more from the tax credit, but could stand to save from other deductions for having a low income if they choose the spending account.
You may need to act fast if you choose to enroll in the dependent-care savings account. The time for employees to choose benefits for the next year wraps up at most companies by the end of November, and people who miss out will have to wait until the following year.
Dependent-care spending accounts tend to be attractive because savings through this plan include federal and state income taxes, plus FICA taxes. So someone in the 27-percent tax bracket can see a break of as much as 34.65 percent, including the standard 7.65 percent reduction from Social Security and Medicare taxes.
For most people, "the child credit tends to be an afterthought," said Ralph Pike, a senior manager with KPMG's personal financial planning group in Chicago. Workers who have the option generally use the tax credit only for expenses beyond what they used in the spending account, he said.
Exception
There is at least one exception to that rule, however. Some states, such as California and North Carolina, offer child-care tax credits that, when combined with the federal break, can make the overall savings from the tax credit greater than those from the savings account, said Joe Lineberry, a senior vice president with Aon Consulting, an insurance and consulting service in Chicago.
To use the spending account, specify to your employer how much you plan to spend in dependent care through the year and your employer will deduct that amount from your paycheck. When you incur costs, you show receipts to the employer, who reimburses you for eligible expenses, as defined by the IRS.
Before you enroll, however, make sure you have a good estimate of how much you expect to spend. Whatever isn't used by the end of the year isn't returned to the account holder. Also, because it's a reimbursement system, people need to make sure they have the cash at hand to pay for expenses upfront, said Susan Connolly, health-care consultant with Mercer Human Resources in Boston.
For those who choose to use the dependent-care tax credit, savings will be more attractive than ever in 2003. You can get a deduction of between 20 percent and 35 percent -- depending on your income -- of eligible expenses on up to $3,000 for one child and $6,000 for two or more children.