Preschool Tax Breaks

• The IRS allows qualified families to use the Child and Dependent Care Credit to deduct 35 percent of the cost of preschool on their taxes. You can deduct $3,000 if you have one child. Your deductions max out at $6,000 if you have two or more children in preschool or day care. There are some restrictions, though, that can put you beyond the reach of this credit.
  
  

Program Restrictions

• The Child and Dependent Care Credit is meant for parents who need to make arrangements for their children so that they can work. If you or your spouse is out of work or stays home with the kids, you wouldn't qualify for this credit. In addition, both you and your spouse must report income; if either of you works off the books, you can't take the credit. That said, in the eyes of the IRS a full-time student counts as an income-earner, so you may still be able to qualify if one of you is in school.
  
  

Dependent Care Spending Accounts

• An alternative to taking a federal tax credit is using a dependent care spending account. Your employer may offer this program, which is similar to flexible spending accounts for health care expenses. You can use pre-tax income to pay for your child's preschooling, thereby saving yourself the percent tax that is regularly deducted from your paycheck. One significant difference from the Child and Dependent Care Credit is that a dependent care spending account allows you to get $5,000 in tax-free money regardless of how many kids you have, but if you don't spend the money, you lose it.
  
  

Choosing One Deduction

• You can only choose one of these two tax breaks. Which one is best for you depends largely on your tax bracket and how the credits work for you within that bracket. For example, if you're in the 25-percent tax bracket, you'd probably want to opt for the Child and Dependent Care Credit. The added wrinkle is that if you have only one child and have more than $3,000 in preschool expenses, a dependent care account may save you more money. Everyone's situation is different, so crunch your numbers and see what works best for you. If you're not sure, seek the counsel of a tax professional.