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The Child and Dependent Care Tax Credit – Federal Tax Deductions for Child Care Expenses

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If you pay for daycare, a credit may be available to offset some of your tax bill. This credit applies as long the qualifying child was under the age of 13 when the care was provided. The credit is also available, regardless of age, for a child, spouse, or other dependent who is physically or mentally unable to care for themselves.

The credit is even available for someone incapable of self-care, who lived with you more than half the year, and is not your dependent because they have a gross income equal to or over the exemption amount, file a joint return, or have been claimed as a dependent on someone else’s return.

Here’s everything you need to know about federal tax deductions for child care expenses. For help with other issues, check out our complete Tax Guide.

Expenses That Qualify

All expenses that you pay for child or dependent care so that you can work or look for work qualify, up to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.

The amounts paid for the care of each child do not have to be equal. For example, you could pay $2,500 for one child and $3,500 for the other, and still use $6,000 as the total care expenses. If you receive child or dependent care benefits from your employer tax-free, you must subtract that amount from your expenses before calculating the credit.

There are some limitations on who can be a care provider when it comes to relatives or dependents. You should be aware that the care provider cannot be your spouse, the parent of your qualifying individual, your child who is under the age of 19, or a dependent for whom you or your spouse may claim an exemption on your tax return.

How to Calculate Your Credit Amount

The credit varies depending on your income and the number of qualifying individuals who receive care. The credit goes from 35% of expenses down to 20% of expenses as your income increases. Your earned income is used to figure this credit. The credit is calculated using the qualifying expenses of $3,000 or $6,000 as noted above, or the earned income of either spouse, if it is lower than these expense limits.

This can get confusing, so let’s use an example.

If two children are being cared for, and the annual expenses on child care total $7,000, the maximum qualifying expenses are $6,000, so you can only receive a credit for that amount. But if either parent’s income is less than $6,000, the amount of the lower income is used as the qualifying expenses. The maximum credit is 35% of $6,000, or $2,100.

The credit percentage changes every $2,000 as your adjusted gross income (AGI) goes from $0.00 to $43,000. See the following table:

Income OverBut Not OverDecimal Multiplier
015,000.35
15,00017,000.34
17,00019,000.33
19,00021,000.32
21,00023,000.31
23,00025,000.30
25,00027,000.29
27,00029,000.28
29,00031,000.27
31,00033,000.26
33,00035,000.25
35,00037,000.24
37,00039,000.23
39,00041,000.22
41,00043,000.21
43,000No limit.20

How to Claim the Credit

The credit is calculated on Form 2441, and is transferred to Form 1040 or 1040A. If you file Form 1040EZ, you cannot claim this credit. In Part I, you need to provide the care provider’s name and address, their social security number (SSN) or employer identification number (EIN), and the amount paid to the provider during  the year. You will find that some states also require the provider’s telephone number. California is one of these states.

In Part II, your provide the names of the individuals for whom the care was provided, their SSN, and the annual cost of the care. The costs of care are combined, but is maxes out at $3,000 for one individual or $6,000 for two or more individuals. Next, you enter the earned income of the taxpayer and, if MFJ, the earned income of the spouse. You compare the three numbers and choose the lowest, and use that number as the qualifying care costs to calculate the credit. You find where your AGI from Form 1040, line 38, fits on the table, and multiply the costs by that decimal amount to yield the amount of the potential credit. This number is compared to the tax liability from the Credit Limit Worksheet in the Form 2441 instructions (page 5), and the smaller figure is the credit amount. In other words, if the tax liability is greater than the potential credit, the full credit is allowed. If the potential credit is larger than the tax liability, the tax liability is the allowed credit amount.

There is a special rule regarding the spouse’s earned income if the spouse is a full-time student (for some part of any fiv calendar months during the tax year) or disabled. The spouse’s earned income is deemed to be $250 for each month he or she was a full-time student or $500 per month if two or more children are being cared for. If the spouse is also working while a student, use the larger of their earned income or $250 or $500 (if two or more individuals are being cared for) for that month.

Part III is for those employees whose employer provides some pre-tax dependent care benefits. This amount is shown in Box 10 of your W-2. The calculations in Part III are used to determine if any of the employer-provided benefits must be included in income (because they are greater than the actual daycare costs). You need to exercise some care in completing Part III, as the instructions are somewhat arcane. After the calculations of Part III, complete lines 27-31 to determine the amount to enter on Part II, line 3 to continue with the credit calculation described above.

Final Word

Finding competent and compassionate care for a child or family member who is incapable of self-care is a challenge. Most states license care providers, but remember the ones that are licensed have only met minimum standards. Referrals from trusted friends and family and interviews with providers when visiting their facilities may pay a large part in making a selection. The Child and Dependent Care Credit is a small gesture to lighten the burden.

For help with other issues, check out our complete Tax Guide.

Which other credits and deductions have you used for dependents?

Gary Tuttle
Gary's extensive professional background varies from small business owner to school administrator. Most recently, he has been involved in taxes, first as a certified preparer, and later as a tax software developer. He is currently licensed to practice before the IRS, volunteers as an instructor for AARP's Tax-Aide program, and has his own tax practice.

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