Cash In on Kids at Tax Time

The credit may also be used if you paid someone to care for a spouse or a dependent of any age who is physically or mentally incapable of self-care. The same limitations apply.

Big note: If you send your kids to a summer day camp so you and your spouse can work, those costs may be included as part of your qualifying expenses. Sleep-away camp, however, does not count, says Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals, because it is considered more of a luxury than a necessity.

Check out the IRS' Publication 503 - Child and Dependent Care Expenses for more details.

If your baby is in college, check out the education credits.

The Hope Credit applies only to the first two years of post-secondary education, such as college or vocational school, and can be worth up to $1,500 per eligible student, per year. It doesn't apply to graduate and professional-level programs. You're allowed 100% of the first $1,000 of qualified tuition and related fees paid during the tax year, plus 50% of the next $1,000. Each student must be enrolled at least part-time.

The Lifetime Learning Credit applies to undergraduate, graduate and professional degree courses, including courses you take to get a job or improve your job skills. If you qualify, your credit equals 20% of the first $10,000 of the tuition and fees you pay during the year. It maxes out at $2,000 per tax return.

You cannot claim both for the same student in the same year.

These credits are phased out when your AGI hits $83,000 and you are filing a joint return ($41,000 for singles) and eliminated completely for $103,000 and over ($51,000 for singles).

Big note: According to the IRS Web site, "the Hope Credit is not allowed for a student convicted of a felony drug offense." No mention of the Lifetime Learning Credit, though. (I swear I didn't make that up.)

IRS Publication 907 - Tax Benefits for Education has more grist.