If you pay for day care, you may be eligible for a tax credit to offset some of your federal income tax bill. This credit applies to qualifying children who were under the age of 13 when the care was provided. It also applies to any child, spouse, or other dependent, regardless of age, 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, they file a joint return, or they’re claimed as a dependent on someone else’s return.
Here’s everything taxpayers need to know about federal tax deductions for child care expenses.
All expenses you pay for child or dependent care expenses so that you can work or look for work qualify. This includes payments to a day care center, babysitter, nanny, before and after school care, and even a summer day camp (overnight camps don’t qualify). You can use up to $3,000 of expenses to calculate the credit 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. The care provider cannot be your spouse, the parent of the qualifying individual, your child who is under the age of 19, or someone you or your spouse may claim as a dependent on your tax return.
If you pay for child care expenses with a flexible spending account (FSA), you can’t use both the FSA and the credit for the same expenses. However, if your family has more than one qualifying person, you’ve already maxed out your Dependent Care FSA to the $5,000 limit, and you have more than $5,000 of qualifying expenses, you can take advantage of both. You can use any expenses over $5,000 (up to the $6,000 maximum) to calculate the dependent care tax credit.
Pro tip: By using tax preparation software from a company like H&R Block, you’ll have confidence you’re getting every available tax deduction and minimizing your tax liability. Plus, if you have any questions while preparing your tax return there are tax advisors available to help.
How to Calculate Your Credit Amount
The credit varies depending on your income and the number of qualifying individuals who receive care. It ranges from 35% of expenses down to 20% of expenses as your income increases. Your earned income is used to calculate this credit.
The calculation can get confusing, so let’s use an example of a family with two children and annual child care expenses of $7,000. The maximum qualifying expense amount is $6,000, so you can only receive a credit for that amount. However, if either parent’s income is less than $6,000, the lower income is used to calculate allowable 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 to $43,000. See the following table:
|Income Over||But Not Over||Decimal Multiplier|
How to Claim the Credit
In Part I of Form 2441, you enter the care provider’s name and address, their Social Security Number (SSN) or Employer Identification Number (EIN), and the amount you paid the provider during the year. Some states also require the provider’s telephone number.
In Part II, you provide the names of the individuals for whom the care was provided, their SSNs, and the annual cost of the care. The costs of care are combined, but the total maxes out at $3,000 for one individual or $6,000 for two or more individuals.
Next, enter your earned income and, if you’re married filing jointly, your spouse’s earned income. Compare the three numbers, choose the lowest, and use that number as your qualifying care costs. You can find your AGI on Form 1040, line 11. Multiply the costs by the decimal amount you find on that table to yield the amount of the potential credit.
Then, compare this number with the tax liability from the Credit Limit Worksheet in the Form 2441 instructions. The smaller figure is your credit amount. In other words, if your tax liability is higher than the potential credit, you can take the full credit. If the potential credit is higher than your tax liability, you’re limited to claiming the tax liability for your credit.
There is a special rule regarding your spouse’s earned income if your spouse is disabled or is a full-time student for some part of any five calendar months during the tax year. In these cases, the IRS deems your spouse’s earned income to be $250 for each month they were a full-time student or $500 per month if two or more children were being cared for. If your spouse also worked while they were a student, use the larger of their earned income or $250 ($500 if two or more individuals were being cared for) for that month.
Part III is for those employees whose employer provides some pre-tax dependent care benefits. You’ll find this amount in Box 10 of your W-2. Your calculations in Part III are used to determine if any of the employer-provided benefits must be included in your income because they were higher than actual day care costs. Exercise care in completing Part III, as the instructions are somewhat arcane. After you’ve made your calculations for Part III, complete lines 27 to 31 to determine the amount to enter on Part II, line 3. Then continue with the credit calculation described above.
Finding competent and compassionate care for a child or family member incapable of self-care is a challenge. Most states license care providers, but remember that licensed providers have only met minimum standards. Referrals from trusted friends and family and interviews with providers should play a large part in making your selection. The dependent care tax credit is a small gesture to lighten the burden.
For help with other issues, check out our complete Tax Guide.